Financial Risk Management Essay Example | Topics and Well Written Essays - 1000 words

Financial find Management - Essay ExampleThis study involves a comprehensive study of the peril management policies followed by Bear Stearns and how it led to its demise. Risk Management An Overview Risk is a term associated with any type of business entity. Without bump it would have been an easy task for managers of a companion to allocate its resources in the most effective way. And with the world experiencing the global financial crisis in the division 2008, effective and efficient risk of exposure management is the key to success for any financial enterprise. The idea of risk management may differ from person to person. In case of regulators risk management is a direction of control, for traders it is a means of hedging their risks and for risk managers it is a means of obtaining the highest return possible by allocating upper-case letter in the best possible way. Risk management takes into consideration the magnitude as well as the nature of risks involved. It is all ab out optimizing the risk-return profile of a company. Sources of risk argon many and it is due to the uncertainties of coming(prenominal) events. In todays world banks are engaged in wide range of activities give care trading of derivatives to its customers which results in exposure, finally jumper lead to risks. Thus risk management plays a vital intention in case of banks. Study and analysis of risk begins with study of Markowitz model of portfolio analysis where he outlined selection of portfolios based on mean of variances in return of portfolios. Sharpe and Lintner further added to this analysis by expect the existence of risk free assets. The rate of return of a risky asset is governed by its positive risk and beta is the measure of this type of risks. Next Black-Scholes model for pricing of options gives a measure of the risk of an underlying security by measuring the volatility in the form of standard deviation. Again whole kit and caboodle of Modigliani and Miller sho wed that value of the firm is not dependent on the expectant structure of the firm. Increase of debt, leading to greater leverage in the capital structure of a firm increases the financial risk for the shareholders of the firm. This means, reengineering of capital structure of the firm would not help the firm, and the management should consider implementing strategies to increase the value of the firm economically. However, it is genuinely difficult and possesses a challenging task for a company to implement these risk management theories practically. For any financial institutions like global banks, before taking up risk management system they mustiness ensure that, they are up to date with their databases regarding various financial transactions within the company and are also aware about financial rates available in the outside market. Also they must have relevant statistical tools to analyze those data. Risk management policies followed by Bear Stearns Bear Stearns was erst while considered as one of the most efficient managers of risk but at the end it was their faulty risk management policies that led to their downfall. Bear Stearns most profitable division was the securitization of mortgage, which brought in almost half of the companys revenues. Regarding mortgage securitization, the company followed a model that was vertically integrated and made profit at every step starting from originating loan, securitizing them and then selling them. These