CORPORATE FINANCE

NAME OF PARTICIPANTS
MAGOUO ATAH JACKYSE ORLANE
BEPE AGATHE YVANA
WORK
I. RISK MANAGEMENT AND FINANCIAL INSTRUMENS
1. TYPES OF FINANCIAL RISK
2. HEDGING STRATEGIES USING DERIVATIVES
3. CORPORATE RISK MANAGEMENT
4. IMPACT OF MACRO ECONOMIC FACTORS AND VIOLATIONS
 RISK MANAGEMENT

Risk management is the process of identifying the potential downsides as well as the potential
rewards of an investment.

Risk Management Techniques

The following are some of the most common risk management techniques.

 Avoidance: The most obvious way to manage risk is to avoid it. Some investors make
their investment decisions by cutting out volatility and risk completely. This means
choosing the safest assets with little to no risks.
 Retention: This strategy involves accepting any risks as the price to be paid for the
chance of high returns.
 Sharing: Risk can be shared among two or more parties. For instance, insurance
companies pay reinsurers to cover potential losses above specified levels.
 Transferring: Risks can be passed on from one party to another. Health insurance
allows consumers to transfer the risk of expensive medical costs to an insurance
company in return for payment of regular premiums.
 Loss prevention and reduction: Rather than eliminating risk, many investors mitigate it
by balancing volatile investments, such as growth stocks, with more conservative
choices.

FINANCIAL INSTRUMENTS

Financial instruments are assets that can be traded or exchanged. Some examples of
financial instruments include stock shares, exchange-traded funds (ETFs), bonds, certificates of
deposit (CDs), mutual funds, loans, and derivatives contracts.

Financial instruments provide efficient flow and transfer of capital among the world’s investors.
They are assets that may be in the form of cash, a contractual right to deliver or receive cash or
another type of financial instrument, or evidence of ownership in some entity.

Financial risk management involves identifying the potential downsides in any

investment decision and deciding whether to accept the risks or take measures to mitigate
them. Financial risk management is a continuing process as risks can change over time.

There are risks in all investments. Successful financial risk management requires a balance
between potential risks and potential rewards.

TYPES OF FINANCIAL RISK

1. Operational Risk
Operational risk in the context of financial risk management encompasses any unforeseen events
in day-to-day operations that could have an effect on the company’s bottom line. For example,
having a manufacturing plant or data center go out for several hours could end up in a loss of
revenue for the business.
Credit Risk
Credit risk is the risk that a customer or borrower fails to meet their financial obligations, like
payments. Companies can take steps to mitigate credit risk through insurance and collateral,
however, some parties may default regardless. Organizations should understand and benchmark
any historical instances of credit defaults, analyze trends, and act accordingly to manage future
credit risks, like through flagging high-risk transactions or preventing buyers with poor credit
from taking out loans. Credit checks are another common means used to evaluate a customer or
borrower’s eligibility for deferred payments.

2. Market Risk
Market risks have to do with capital markets and financial markets as a whole, such as a risk in a
particular sector or geopolitical effects on macroeconomic conditions. High interest rates in the
market discourage people from taking out loans and encourage savings, providing a potential risk
to lenders and banks’ revenue. The availability of capital can impact companies’ valuations.
Market risks are difficult to predict and may come about suddenly, but maintaining a strong FRM
program can keep your organization vigilant and prepared.

3. Liquidity Risk

Liquidity risk is somewhat like the inverse of credit risk, in which the organization is
unable to meet its financial obligations or make payments — due to a lack of cash or
funds. Liquidity risk can be an existential threat to an organization, and even lead to a
going-concern risk. Managing cash flow, liabilities, and assets in a balanced way and
maintaining regular FRM practices and controls can help organizations limit the risk
of liquidity and keep the company’s cash flow healthy.

4. Legal Risks
Legal or compliance risks are those risks associated with a loss due to failing to meet
legal, regulatory, or compliance requirements that are necessary for your organization
and your industry. Legal risks can include the risk of financial loss due to lawsuits,
like with a defective product causing bodily injury, while the risk of noncompliance
can lead to fines and lost sales. Integrating FRM with the organization’s larger
enterprise risk management (or equivalent) function ensures that risks don’t fall
through the cracks between silos and encourages a collaborative and proactive
approach to risk management.

5. Foreign Exchange Risk or Currency Risk

Foreign exchange or currency risks are realized when unexpected changes to the
foreign currency exchange rate have an impact on the organization’s financial
standing. Fluctuations in foreign exchange rates can have a substantial impact on the
valuation of an organization’s investments, financial positions, and holdings,
especially when they’re sudden and unforeseen. This type of risk is more likely to
occur in multinational corporations; companies that are heavily invested in imports
and exports; and organizations that have significant financial holdings in foreign
countries. Managing this economic exposure can be achieved through operational
strategies, like diversifying the locations of facilities; markets where products are sold;
and sourcing of materials. Currency risk-specific mitigation options are also available,
such as currency flows and currency swaps that allow companies to limit the impact of
currency exchange rate changes.
6. Interest Rate Risk (IRR)
Interest rate risk is the potential for investment losses that can be triggered by a move
upward in the prevailing rates for new debt instruments. If interest rates rise, for
instance, the value of a bond or other fixed-income investment in the secondary
market will decline. The change in a bond's price given a change in interest rates is
known as its duration.
Interest rate risk can be reduced by buying bonds with different durations, or by
hedging fixed-income investments with interest rate swaps, options, or other interest
rate derivatives.
For fixed-income securities, as interest rates rise security prices fall (and vice versa).
This is because when interest rates increase, the opportunity cost of holding those
bonds increases – that is, the cost of missing out on an even better investment is
greater. The rates earned on bonds therefore have less appeal as rates rise, so if a bond
paying a fixed rate of 5% is trading at its par value of 10,000 when prevailing interest
rates are also at 5%, it becomes far less attractive to earn that same 5% when rates
elsewhere start to rise to say 6% or 7%.
HEDGING STRATEGIES
What is Hedging?
Hedging is a risk management strategy used to offset potential losses in one
investment by making another investment. Essentially, it's like taking out insurance to
protect against unfavorable market movements. The goal is to reduce the impact of
price volatility and minimize the risk of financial loss.
What are Derivatives?
Derivatives are financial instruments whose value is derived from an underlying asset,
index, or rate. The most common types of derivatives are futures, options, forwards,
and swaps. These instruments can be used to hedge against various types of risks,
including price fluctuations, interest rate changes, and currency exchange rate
movements.
Why Use Derivatives for Hedging?
Derivatives are popular for hedging because they allow investors and companies to
manage risk without having to sell or buy the actual underlying assets. This provides
flexibility and can be cost-effective compared to other risk management methods.
Common Hedging Strategies Using Derivatives
1. Futures Contracts
Futures contracts are standardized agreements to buy or sell an asset at a
predetermined price on a specific future date. They are traded on exchanges,
which provide liquidity and reduce counterparty risk.

How to Use Futures for Hedging

Hedging Commodity Price Risk: A farmer expecting to harvest wheat in six months
can sell wheat futures contracts now to lock in a price. If the price of wheat falls by
harvest time, the farmer's loss on the sale of wheat is offset by the profit from the
futures contract.
Hedging Stock Market Risk: An investor holding a portfolio of stocks can sell stock
index futures to protect against a market downturn. If the stock market declines, the
loss in the portfolio is offset by the gain in the futures position.
2. Options Contracts
Options give the buyer the right, but not the obligation, to buy (call option) or
sell (put option) an asset at a predetermined price before or at the expiration
date. The buyer pays a premium for this right.
How to Use Options for Hedging
Protective Put: An investor holding a stock can buy a put option on the same stock. If
the stock price falls, the put option increases in value, offsetting the loss in the stock.
This strategy provides a safety net while allowing the investor to benefit from any
potential upside. For example, if an investor wants to buy a stock but thinks its price is
currently too high, they can sell a put option at their desired entry level (support) and
can enjoy the premium profit of the sell put. If the stock price falls to this level, they
can exercise the put option and buy the stock at the lower price, thus entering the
position at a more favorable price.
Covered Call: An investor who owns a stock can sell a call option on that stock. The
premium received from selling the call option provides some income and can offset a
small decline in the stock's price. However, if the stock price rises significantly, the
investor may have to sell the stock at the strike price, potentially missing out on some
gains. For instance, if you own a stock and find it in a sideways market, you can sell
the same quantity of the holding as of the lot size. This way, you generate income
from the premium while waiting for the stock to move out of the sideways pattern.
Vega (ν): Vega measures an option's sensitivity to changes in the volatility of the
underlying asset. Higher volatility generally increases an option's price because it
raises the probability of the option ending in the money.
Rho (ρ): Rho measures the sensitivity of an option's price to changes in the risk-free
interest rate. For call options, a rise in interest rates typically increases their value,
while it generally decreases the value of put options.
3. Forward Contracts
What are Forward Contracts?
Forward contracts are customized agreements between two parties to buy or sell an
asset at a specified future date for a price agreed upon today. Unlike futures, forwards
are traded over-the-counter (OTC), making them more flexible but also introducing
counterparty risk.
How to Use Forwards for Hedging
Hedging Currency Risk: A company expecting to receive payment in a foreign
currency can enter into a forward contract to sell that currency at a fixed exchange
rate. This protects the company from unfavorable currency fluctuations.
Hedging Interest Rate Risk: A company expecting to take out a loan in the future can
enter into a forward rate agreement (FRA) to lock in the interest rate. This ensures that
the company is not exposed to rising interest rates.
4. Swap Contracts
Swaps involve the exchange of cash flows or other financial instruments between
parties. The most common types are interest rate swaps and currency swaps.
How to Use Swaps for Hedging
Interest Rate Swaps: A company with floating-rate debt can enter into an interest rate
swap to exchange its variable interest payments for fixed interest payments. This helps
the company stabilize its interest expenses.
Currency Swaps: A multinational company with revenue in one currency and expenses
in another can use a currency swap to manage exchange rate risk. By swapping cash
flows in different currencies, the company can better match its revenues and expenses.

CORPORATE RISK MANAGEMENT POLICIES

Corporate risks are potential barriers to the council achieving its priorities. These
risks have the potential to disrupt large parts of our service.

The purpose of corporate risk management is to identify potential risks using

organisational knowledge of the internal and external environment. These risks
are then analysed to identify their potential likelihood and impact. We then
evaluate whether a risk should be accepted or treated, and implement a plan to
reduce the likelihood or potential impact of these risks.

Risk management is a key element of corporate governance and effective risk

management should strengthen our ability to achieve our objectives.

Steps involved in corporate risk management policies

Step One- Identifying Risks

Risk identification is the first and most critical step in the risk management process. It
involves discovering potential risks that could impact the achievement of objectives.
The goal is to uncover risks before they materialize, so they can be managed
effectively.
Techniques for Risk Identification
Brainstorming: Engage employees from various departments to generate a list of
potential risks. This collaborative approach ensures a diverse range of perspectives.
Active and engaged safety committees can play a huge role in this process.
SWOT Analysis: Evaluate Strengths, Weaknesses, Opportunities, and Threats. This
method helps identify internal and external risks related to each aspect of the SWOT
framework. Using the SWOT analysis in post-incident debriefs can be very useful.
Checklists: Use established risk management checklists as a reference. These lists are
often based on previous experiences.
Historical Data Analysis: Review past records and incidents to identify risks that have
affected similar situations.
Documentation
Document all identified risks, including:
Risk Description: A clear and concise explanation of the risk.
Risk Owner: The person responsible for managing the risk.
Risk Category: Classification of the risk (e.g., financial, operational, strategic).
Potential Impact: A description of how the risk could affect objectives.
Step Two- Evaluating Risks
Risk evaluation involves assessing the identified risks to determine their potential
impact and likelihood. This step helps prioritize risks based on their severity and
probability.
Techniques for Risk Evaluation
Qualitative Risk Analysis: Assess risks based on their nature and impact without
numerical data. This involves rating risks as high, medium, or low in terms of impact
and likelihood.
Quantitative Risk Analysis: Use statistical methods to measure the probability and
impact of risks.
When evaluating risks, consider the following factors:
Likelihood: The probability that the risk will occur.
Impact: The extent of the effect on objectives if the risk occurs.
Exposure: The potential for the risk to occur over time.
Severity: A combination of impact and likelihood.
Step Three- Mitigating Risks
Risk mitigation involves developing strategies to manage or reduce the impact of
risks. The objective is to minimize negative outcomes and enhance opportunities.
Strategies for Risk Mitigation
Avoidance: Change the plan or strategy to eliminate the risk. For example, choosing a
process that is less prone to failure.
Reduction: Implement measures to reduce the likelihood or impact of the risk. This
might involve adding safety features or increasing staff training.
Transference: Shift the risk to another party. This can be done through outsourcing,
insurance, or contractual agreements.
Acceptance: Acknowledge the risk and decide to manage it without taking additional
actions. This is typically done when the cost of mitigation exceeds the risk itself.
Develop a Risk Response Plan
Create a Risk Response Plan that outlines:
Mitigation Actions: Specific steps to reduce risk.
Contingency Plans: Alternative actions if the risk materializes.
Monitoring Procedures: Methods for tracking risk and assessing the effectiveness of
mitigation strategies.
Effective risk management is vital for the safety of employees and achieving
organizational goals. By carefully identifying, evaluating, and mitigating risks,
uncertainties can be navigated, and objectives safeguarded. Each step in the risk
management process builds on the others, creating a solid framework for managing
risks.
 IMPACT OF MACROECONOMIC FACTORS AND VIOLATIONS
Corporate valuation, the process of determining the worth of a company, is
profoundly influenced by macroeconomic factors that shape economic conditions at a
national and global level. These trends encompass a wide range of indicators,
including GDP growth, inflation rates, interest rates, employment levels, and
geopolitical stability. This article explores the critical influence of macroeconomic
trends on corporate valuation, examining key factors, methodologies, and strategic
considerations for stakeholders in today’s dynamic economic landscape.

UNDERSTANDING MACROECONOMIC TRENDS AND THEIR

IMPACT
 GDP Growth and Economic Cycles: Economic expansions and
contractions directly impact corporate earnings, revenue growth, and
profitability. High GDP growth rates typically correlate with increased
consumer spending, business investment, and market demand, positively
influencing corporate valuations. Conversely, economic recessions or
slowdowns may depress earnings and reduce the perceived value of
companies.
 Inflation and Interest Rates: Fluctuations in inflation rates and central
bank interest rate policies affect the cost of capital, borrowing costs, and
discount rates used in valuation models. Higher inflation rates and
interest rates can reduce company valuations by increasing financing
costs and lowering present values of future cash flows. Conversely, low
inflation and accommodative monetary policies can support higher
valuations by reducing borrowing costs and stimulating economic
activity.
 Employment and Consumer Confidence: Labor market conditions,
including unemployment rates and wage growth, influence consumer
confidence, spending patterns, and corporate sales volumes. Strong
employment levels and rising consumer confidence typically support
higher corporate earnings and valuations, reflecting robust consumer
demand and economic stability.
 Geopolitical Stability and Trade Policies: Geopolitical events, trade
tensions, and international trade agreements can introduce uncertainty
into global markets, impacting corporate profitability, supply chain
operations, and market access. Valuation methodologies must account for
 geopolitical risks, currency fluctuations, and regulatory changes that may
affect business operations and market dynamics.
Methodologies for Incorporating Macroeconomic Trends in Valuation
 Discounted Cash Flow (DCF) Analysis: DCF models discount projected
future cash flows using a discount rate that reflects prevailing
macroeconomic conditions, including risk-free rates and equity risk
premiums adjusted for economic cycles and market volatility.
 Market Multiples Approach: Comparative valuation methods, such as
price-to-earnings (P/E) ratios and enterprise value-to-sales (EV/Sales)
multiples, benchmark companies against industry peers under similar
economic environments. Changes in macroeconomic trends can influence
market multiples by altering investor sentiment and market expectations.
 Scenario Analysis and Sensitivity Testing: Valuation professionals
conduct scenario analysis and sensitivity testing to assess the impact of
macroeconomic variables on valuation outcomes. Scenarios may include
varying GDP growth rates, interest rate changes, or inflationary pressures
to evaluate the resilience of company valuations under different
economic scenarios.
VIOLATIONS
 Interest rate risk: sudden changes in interest rate due to central bank
policies or economic conditions can affect the valuation of fixed-income
securities
 Currency risk: fluctuations in exchange rates can affect the value of
investments in foreign states
 Economic growth rates: unexpected changes in GDP growth can
influence corporate earnings and valuations
 Inflation risk: higher-than-expected inflation can erode the purchasing power of
cash flow from financial instruments.
 Geopolitical risk: political instability or conflicts can disrupt markets and affect
economic conditions unexpectedly.