FINANCIAL RISK MANAGEMENT IN TREASURY- AvantGard ...

Part I: Mitigating, Identifying and Defining Financial Risk

It is not a secret that financial risk management has become a priority in recent years. Tumultuous economic conditions have created new challenges in treasury and the headlines often feature the fallout of failed financial risk policies. Having a strategy in place to deal with risk is of utmost importance to today?s treasury professionals, and companies are re-evaluating their framework for measuring and monitoring financial risk.

SunGard AvantGard recently conducted a study of 222 treasury professionals in the second quarter of 2012 to better understand how corporations are addressing various aspects of financial risk. The study included respondents from around the world spanning a broad range of industry and revenue classifications, with over 62 percent of respondents from companies with more than $1 billion in revenue.

Mitigating financial risk: Is there an effective framework in place?

The first step in managing risk is to identify areas that expose the company to potential risk. Once a company has a handle on the scope of exposure, it can begin to create a risk management framework.

Of the companies surveyed, 86.9 percent said that they have an established framework in place for mitigating financial risk. Furthermore, 60.4 percent of respondents felt their organizations were above average at identifying financial risk exposure, identifying their companies as somewhat to very effective.

Identifying and Defining Risk

Without a solid grasp on areas of risk exposure, it is challenging for companies to design effective risk reduction strategies. Uncertainty surrounding risk exposure makes it difficult for corporate treasurers to make informed decisions and reduce potential losses, making identifying and measuring risk crucial to a company?s survival.

The SunGard AvantGard study identified seven types of risk: commodity, counterparty, credit, currency/FX, interest rate, liquidity, and market risk. Respondents identified market risk as the most difficult to measure, followed by counterparty and commodity risk. Interest rate risk was identified as the easiest to quantify.

Stay tuned for Part II of my Financial Risk Management in Treasury blog series in which I will discuss various types of risk and how our market study participants responded about their actions around these types of risks.

Are you able to mitigate, identify and define your financial risk management in treasury? I would like to hear from you.

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Source: http://blogs.sungard.com/fs_treasuryinsights/2012/12/06/financial-risk-management-in-treasury/

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