Impact of Financial Risks on an Organization
Project Prompts
Write a 1,000-1,200-word analysis discussing financial risk concepts and assess the impact of the different financial risks on an organization. For this assignment, you will structure your assignment using four research paper sections associated with corporate risk management, as studied in the course. Base your research paper on the financial statements analyzed in Corporate Finance 301 assignment 2 and apply the knowledge acquired in the analysis. Define each financial risk, discuss the risk associated components, and evaluate the financial risks and how they affect the corporation's financial status.
_Research Paper Sections_
The research paper should include the following financial risks:
Market Risk
Liquidity Risk
Credit Risk
Operational Risk
Using Sources
You may refer to the course material for supporting evidence, but you must also use at least three credible, outside sources and cite them using APA format. Please include a mix of both primary and secondary sources, with at least one source from a scholarly peer-reviewed journal. If you use any Study.com lessons as sources, please also cite them in APA (including the lesson title and instructor's name).
Primary sources are first-hand accounts such as interviews, advertisements, speeches, company documents, statements, and press releases published by the company in question.
Secondary sources come from peer-reviewed scholarly journals, such as the Journal of Management. You may use sources like JSTOR, Google Scholar, and Social Science Research Network to find articles from these journals. Secondary sources may also come from reputable websites with .gov, .edu, or .org in the domain. (Wikipedia is not a reputable source, though the sources listed in Wikipedia articles may be acceptable.)
If you're unsure about how to use APA format to cite your sources, please see the following lessons:
What is APA Format? Definition & Style
How to Format APA Citations
Grading Rubric
Category Unacceptable (0) Needs Improvement (1-3) Good (3-4) Excellent (5) Points
Structure (x2) Structure is illogical or significantly hinders understanding Structure is unorganized and presentation lacks clarity Structure is well-organized and includes sufficient supporting detail Structure is well-organized; ideas flow logically and main points are identifiable 10
Defining of financial risks (x2) Definitions of financial risks are illogical or significantly hinders understanding Financial risk definitions are difficult to identify; concepts are disjointed Financial risks are well-defined and include sufficient supporting detail Financial risks are well-defined and supporting detail exceeds requirements 10
Addressing financial risk and effects on organization (x2) No discuss of financial risks and the effects on an organization Minimal discussion of financial risks and effects on organization Financial risks are addressed but lack supporting detail Financial risks are addressed and supporting detail is present 10
Mechanics (x2) Incorrect spelling, punctuation, capitalization, and use of standard English grammar hinders understanding Several instances of incorrect spelling, punctuation, capitalization, and usage of standard English grammar Few instances of incorrect spelling, punctuation, capitalization, and usage of standard English grammar No or very few instances of incorrect spelling, punctuation, capitalization, and usage of standard English grammar 10
Total Possible Points 40
Before You Submit
When you are done writing your essay, we suggest taking some time to check for any errors or to add some final touches. We also suggest that you use online plagiarism checkers such as PlagScan or DupliChecker to make sure that your essay is not too similar to any existing materials. Plagiarized submissions will NOT be graded.
Business Management: Impact of Financial Risks on an Organization
Name
Institutional Affiliation
Business Management: Impact of Financial Risks on an Organization
In recent years, the issue of the impact of financial risk management has gained interest among financial managers, business leaders, and academia. The grand objective of businesses is to make a profit, and all strategies and activities undertaken within an organization are for realizing this ultimate goal (Noor & Abdalla, 2014). Much of the past and present empirical investigations into the issue of business risks or uncertainties have recognized the importance of stable corporate financial systems in an efficient and functional economy (Odubuasi et al., 2020). For instance, while the banking sector is a critical player in financial intermediation, the industry operates in a fragile and unstable environment with bottlenecks to meeting its financial obligations (Sathyamoorthi et al., 2019). Risks are not unique to banks but are common challenges that demand effective financial risk management practices in the business industry. Uncertainties, including market, liquidity, credit, and operational risks, reflect the probability of a firm becoming inadequate in meeting its obligations and have become the hallmark of business risk management.
Market risk
Market risk is one of the financial risk management proxies that have a statistically significant negative impact on organizational performance. These are losses that firms incur due to changes in the price of held assets following changes in commodity prices, securities, interest rates, foreign exchange rates, and other market uncertainties (Odubuasi et al., 2019). Measured by interest rates, Sathyamoorthi et al. (2019) have found that market risk management practices hurt the return on assets (ROA) and return on equity (ROE) of commercial banks in Botswana. In the Nigerian Oil and Gas sector, Odubuasi et al. (2020) present findings that although exchange rates impact both ROA and ROE, equity and commodity price changes have no significant impact. The same study finds that interest rates affect ROA but not ROE. Odubuasi et al. (2020) recommend that firms need to employ hedging in controlling the exchange rate changes, and governments should enact policies lowering interest rates and protecting firms from market uncertainties. Financial analysts warn that compared to credit risk, market risk is a more volatile exposure due to rapid changes in market conditions that lead to financial losses and the ultimate collapse of businesses (Odubuasi et al., 2020). Market uncertainties can lead to losses in a firm’s liquidity due to movement in market prices caused by changes in commodity and equity prices, foreign currency, and interest rates. Therefore, effective market risk management has a significant positive correlation to the performance of firms.
Liquidity risk
Liquidity risks arise when a firm fails to market investment or security because of its inability to trade quickly and minimize or prevent a loss and make the expected profit (Noor & Abdalla, 2014). The lack of timing and the size of trade may expose firms to liquidity risks, which seriously impact the overall financial performance. As firms fail to maintain the required liquidity positions to facilitate efficient operations, they are exposed to significant financial risks of failures to match the maturity period of outflows and inflows of liquid assets. Liquidity risk management practices assess the ability of a firm to procure adequate funds during a period of the high cost of liquidity transformation that could affect both capital funds and income (Kinyua & Fredrick, 2022). This risk lowers the potential of a firm to honor its financial obligations promptly due to financial incapability or capital inadequacy as measured through the net stable funding ratio (NSFR) and liquidity coverage ratio (LCR) (Muriithi & Waweru, 2017). Both internal and external factors play a significant role in liquidity risk, including the size of the company, operational and innovative risks, liquidity level, inflation rate, capital adequacy, asset tangibility, and financial leverage....