Enterprise Risk Management, 2nd Edition

CHAPTER 29Managing Financial Risk and Its Interaction with Enterprise Risk Management

 

DANIEL A. ROGERS PhD, CFA, CAIA, FRM

The School of Business, Portland State University

 

INTRODUCTION

At the time of this writing (August 2020), the world continues to grapple with the outbreak of COVID-19 that began in late 2019. This pandemic is a terrible example of a risk outcome that is catastrophic in terms of public health, business, and individual circumstances. While some are not directly affected other than the disruption of day-to-day life, lives have been altered, perhaps forever, and many businesses may not survive. It is in this context that I write an update to this chapter (which was originally written in 2009). While many aspects of financial risk management may not have changed significantly in the past 11 years, I emphasize in this update that the role of financial risk management should continue to be emphasized as simply one piece of a firm's overall risk management strategy.

Financial risk management encompasses corporate strategies of employing financial transactions to eliminate or reduce measurable risks. Most businesses face financial risks of some sort, such as currency price volatility, interest rate changes, commodity price fluctuations, or from some other source.

A key attribute of a financial risk is that it can be managed by entering into some form of contract that can be settled in cash. Classic forms of contracts with these characteristics include forward ...