The Value of Risk Management

For some, risk management conjures up images of elaborate frameworks, technical jargon, and vast spreadsheets of risks and impact scores. It can sound pretty boring! But it's important that the risk management function within an organisation is active, visible, and works closely with all stakeholders, collaborating to achieve goals, not stuck in an office pouring over those spreadsheets!

Persuading a tentative CEO of the value of risk management starts with the definition:

Risk is the effect of uncertainty on objectives

ISO 31000

If we frame the purpose of the risk management function in terms of the organisation’s objectives, then we’re off to a good start.

Key Benefits of risk management

• Enabling better decision-making 
• Minimising negative impacts of events and externalities
• Demonstrating sound governance
• Better financial performance
• Ensuring compliance with rules and regulations

Risk management isn’t free, though. Depending upon the complexity, size, and regulatory backdrop of the business, the risk management function may require a large team and sophisticated (and expensive) software systems. 

We can measure the value that risk management brings by analysing trends, comparing performance to previous years, comparing the business’ experience through a major event with that of peers, and by demonstrating the robustness of the outcomes of the process.

We know that risk management works because businesses that effectively manage risks are more stable, more profitable, and enjoy long-term growth.

More intelligent, risk-based decisions are synonymous with sound business management and are conducive to the achievement of goals.

Harry Mills, Founder & CEO Oku Markets

A Word on Currency Risk

Currency risk is just one part of the financial risks that businesses can be faced with. The following steps are a practical and simple guide on how to assess your position:

Identify your risks by analysing all cash in- and outflows, the location and currency of your supply-chain and customer base, and any other assets or liabilities denominated in foreign currencies 

Assess and quantify your risk by calculating the total currency exposure in notional terms, and statistically analysing the volatility of the currency pairs you trade in

If you can transfer the risk to another party or avoid it altogether then that should be the starting point, otherwise take mitigating action by hedging the risk using currency forwards or options

Monitor your risk using a set of Key Risk Indicators (KRIs) and maintain your hedging position as time passes and your position evolves

Summary

Risk management enables better decision-making and promotes stability and growth within a business. We can prove the value of effective risk management by analysing trends and drawing comparisons between other similar companies. Currency risk is a critical financial risk for most businesses, but the solution needn't be too complex or onerous.

Oku Markets provides currency risk management support and trade execution services to businesses of all sizes.