Financial Markets and Risk Management

Financial Markets and Risk Management

Conducting everyday business operations for any company can be a challenging adventure. Every business starts out with practically nothing but an owner with imaginings of a prosperous business. One of the challenges that these business and owners may face, is the opportunity to conduct business in other countries with dissimilar currencies. These challenges create many financial risks of conducting business internationally. Since the two different countries have unalike types of currency then the exchange between the two different currencies for one company can cause problems.

Recession and financial conflict have in recent years provided an uncomfortable reminder of the financial risk of international business. International corporations, financial institutions, and international investors have experienced that the profitability of their primary business has been harmfully affected by major fluctuations in exchange rates, stock market prices and in the credit rating of counter parties. Additionally, the business risk inbuilt in the primary business of an international corporation, which is dealt with by long term strategic planning and business cycle monitoring, the international corporation has to deal with financial risks. Some of them are listed below (Bostas, 2005).

1. Interest rate risk - The risk of increased funding costs due to high rates of interest, which may dominate for longer or shorter periods.

2. Liquidity risk - The risk of running short of cash when liquidity in the banking system is scarce and expensive.

3. Credit risk. -The risk of losses due to the inability to pay by counter parties,

Risk Assessment of Exchanges/Clearing Houses

Brokers/intermediaries should consider information available about the risks of trading on a particular exchange/clearinghouse prior to executing trades on such market. Such risks should be monitored on an ongoing basis. Among the factors that might be appropriate to consider in determining whether to transact on a particular exchange/clearinghouse are the quality of the regulatory and oversight system of the exchange/clearinghouse; the applicable financial integrity system, relevant customer protection mechanisms (e.g., segregation requirements, account insurance, guarantees or compensation funds); the source and liquidity of relevant financial support; the margining and settlement system; the ability to transfer positions and property in the event of a default; the ability of the exchange/clearinghouse to impose capital requirements on its members, to require its members to increase their capital, or to assess its members; the description of the clearing members and/or shareholders; and the regulatory and legal system including applicable bankruptcy laws in the relevant jurisdiction.

Leveraged Buy-Out

A leveraged buy-out (LBO) is an acquisition of a public or private company in which the takeover is financed predominantly by debt with minimum equity investment. The debt is typically structured to include a combination of bank loans, loans from other financial institutions and bonds with below investment-grade credit ratings, referred to as high-yield bonds. Assets of the acquired company act as collateral for the debt and interest and principal obligations are met through cash flows of the refinanced company (Wikipedia, 2010).

LBOs appeal to private equity firms due to the size of acquisitions that can be made ...