Financial Management: Principles and Applications, 13/e

Chapter Summaries

20.1 Define risk management in the context of the five-step risk management process. (pgs. 634–637)

Summary:

The process of analyzing a firm’s exposure to risks of all kinds and determining how best to handle that risk exposure is called risk management. The five-step risk management process is as follows:

1. Step 1. Identify and Understand the Firm’s Major Risks.  Typically, these will include consideration for demand risk related to the firm’s goods and services, commodity price risk related to the commodity inputs the firm uses in its operations, country risk that derives from where the firm’s operations are located throughout the world, operational or cost-control risk, and foreign exchange risk.

2. Step 2. Decide Which Types ...