Corporate Risk Management Case Study

Corporate risk management is one of the most vital and important concerns of executives and treasurers. Risk management is defined as the performance of activities aiming to minimize the negative impact of uncertainty with regards to possible losses (Schmit & Roth, 1990). To be able to respond accordingly to risk exposure management must be aware of the specific risks and have good understanding of their implications for a firm. Recently, with more companies being exposed to an array of unsystematic risks, risk management policies and corporate hedging practices have become a fundamental part of a business’ strategy. Furthermore, risk management provides strategies that executives can use to manage uncertainty that would otherwise result in

Moreover, translation risk consequently has an effect to the consolidation of a foreign subsidiary to the parent company’s balance sheet. For publicly traded companies such as CBS Corporation, this can be a significant issue as inaccurate management of translation exposure can result in weaker performance of foreign subsidiaries. To measure translation exposure, the exposure of net assets (assets less liabilities) to potential exchange rate fluctuations is often the preferred

The argument to support this proposition is that the cash flow generated by the company’s assets is the determinant of its value. If the company lowers the risk of its cash flow stream by selling a risky cash flow in exchange for a low risk cash flow, the value of the company will remain constant. M-M support this by stating that when selling a high risk cash flow to the capital market, the firm sacrifices a correspondingly high return and receives a low risk, low return cash flow. Furthermore, the theorem holds that “the average cost of capital to any firm is completely independent of its capital structure”(M-M, 1958, p.268), thus shareholders are not concerned with a firm’s financial policy as they can diversify unsystematic risks perfectly and require a risk premium as compensation for systematic risk. Systematic risk refers to the market risk, generally used as “beta” in the CAPM model (Cuthberson,