CII 997 Coursework 1: Advanced Risk Financing and Transfer Analysis

This coursework assignment analyzes the risks associated with a joint venture between two companies, ELD and FIH. It identifies four key risks: management risk, political and economic risk, default risk, and exchange risk. The analysis delves into the specifics of each risk, considering factors like management style clashes, economic slowdowns, potential bankruptcy, and currency fluctuations. The assignment then proposes and evaluates three risk financing solutions: insurance, derivatives, and a 'do nothing' approach. Insurance is considered for mitigating management and default risks, while derivatives are suggested for managing exchange rate fluctuations. The 'do nothing' approach, focusing on improved management, is also considered. The document examines the advantages and disadvantages of each risk financing solution, providing a comprehensive overview of risk management strategies in the context of international joint ventures. The assignment is designed to assess the student's understanding of advanced risk financing and transfer principles within the CII 997 curriculum.

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Joint Venture Risk Analysis
Joint Ventures is actually a way to combine the resources and expertise of the two different
companies which is actually based on the risk sharing methodologies and overall profit or
loss of the firm. There are actually certain advantages and disadvantages of the risk
associated with joint ventures. Based on the financial relationship among the ELD and FIH,
the joint venture is actually termed as an international joint venture dealing with certain risk
in the business. Based on the financial performance and analysis of both the company it will
be better to go ahead with the proposition placed forth by FIH for joint venture partnership.
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Both ELD and FIH is involved in the expansion growth by ascertaining good returns despite
of the significant business obstacles which the company will face from the day of
commencement of such business. The proposition of joint venture will automatically enhance
the overall performance of the two companies in terms of risk and reward sharing strategies.
The maximum return is particularly based on the time based investments and monetary
terms of each entities of the business.
Following are the four identified risks with the acceptance of the joint venture proposal:
1. Management Risk
2. Political and Economic Risk
3. Default Risk
4. Exchange Risk
The risk have been defined accordingly based on the joint venture proposition of the two firm
which are the FIH and ELD in the region of UK. It is actually designed to understand the
significance of the risk management framework and to understand the effective strategies of
the management and the risk exposure associated with.
Management Risk
Management risk of the company is related to the internal risk factors of the business which
is dealt by the internal management. The clash actually takes place among the management
styles and cultural factors. Both the companies objectives must be same and significant risk
and return are also related to the venture. The clashes is further among the workspaces of
the management styles and the business carried out by the entire business entity. The
difference will further lead to the viability of the joint venture and the risk partnership before
the maturity of the business.
For ELD, there are certain risk which are associated with the management which actually
deals with the huge differences of the UK-Us practices and it is correctly implemented. It is
further related to the bottleneck based on the projected progress of the company. The
management have to make sure that there is effective communication and understanding in
the development of the business in each and every perspective. The critical decisions which
are taken by the management by analysing and interpreting the results of the same.
Political and Economic Risk
The political and the social risk are particularly based on the environmental factors of the
actually means that this kind of risk may put a dent in the joint venture of FIH and ELD. The
economic slowdown is another risk which may take place due to the shrink in the market. In
such a situation there may be a financial struggle in the business where the upper level
management of the firm must take care of such major fluctuations in the business process of
the venture. The financial fluctuation might take place due to such changes in the political
and economic factors of the firm.
Default Risk
The default risk is regarding the bankrupt of the company which is a unlikely situation may
take place in the near future due to the negligence in the management system of the firm.
Competitive bargaining power will further help the business to sustain in the long run and it
will become quite unlikely that in the future the winding up or dissolution of the company may
happen. As per the reports it is found that the financial performance of FIH is enhancing
accordingly. But since the incorporation of the company, the profit of FIH is not disclosed.
The situation in that case must be analysed by the upper level management of the firm with
the help of detailed investigation. However, the situation can be assessed at a higher-level
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as requiring further investigation. Thus, the default risk is more pertinent and would require
effective mitigation tactic to hedge against it, provided the company chooses to go through
with the joint venture. Insurance and similar alternative hedging products can allow for
reduced exposure to the default risk caused due to partaking in the joint venture. ELD is
currently heavily insured and therefore, can look into moving ahead with this decision of
initiating a joint venture. It is recommended, however, to assess and include more financial
products for international businesses and related risk and insurance.
Exchange Risk
Lastly, a major risk that international businesses are prone to be exchange risk. It is also one
of the significant aspect which is related to the political and economic factors. The currency
exchange rate will definitely create impact during the projection of the budget and forecasted
sales of the company. It will also create impact in the profitability position and the other
parameters associated with it. There actually is a positive or rather strong relation among the
both the countries which are the US and UK. This also creates impact on the significant
fluctuation in the exchange rates of the company and the risk associated in that case will be
less if the relationship among the two countries is effective. Suppose in terms to current
situation there is a significant drop in UK pounds which is quite observed in the referendum
of Brexit which happened in the year 2016. Further the implementation of the various
financial instruments will also help the firm to evaluate the exchange risk involved in that
case.
Three Risk Financing Solutions
Each of the suggested risk exposure would require a certain amount of risk financing. Risk
financing refers to the accumulation and allocation of funds to mitigate the risks, in this case,
of proceeding with the joint venture with an international company situated in another
continent. Following are the three suggested risk financing solutions that are suggested for
each of the above-mentioned risk exposure after analysis through the four T's framework of
risk management, as briefly discussed alongside each of the financing solutions.
1. Insurance
2. Derivatives
3. Do Nothing
Each of the risk financing solutions is discussed below with the intent to understand the
particular risk it targets to resolves, following its strategy used based on the T's of the risk
management framework.
Insurance
As per the reports it is obtained that ELD is currently linked with heavy insurance based on a
moderate low risk. Insurance is the ultimate banking solution in finance and there are certain
risk associated with the financing method of the business. There are also certain exposure
related to risk and insurance products which actually requires payment of premium actually
made by ELD. The framework which is related to the risk management takes place by the
help of the transfer techniques which is employed by sharing associated with the failure of
FIH. ELD can appeal FIH to take a larger share in the risk mitigation tactic, considering the
company would be operating in its locality. Through similar streams protracted as an
insurance product, the same can be employed with the joint venture risk sharing or transfer
technique. This methodology will tackle the management and default risk of the four risk
exposures of the ELD company.
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Derivatives
The exchange rates is further depended on the changes in the political and economic factors
which is quite convenient to imply the specialized instruments and application of derivatives.
The fluctuation in the underlying assets is further depended on the evaluation and the
related transaction which takes place in that case. The instruments are rather used for the
purpose of managing the underlying assets of the firm by offsetting the difference. The
swaps and option are related to the foreign exchange where the fixed rates are allowed for
the purpose of reducing the overall losses in that case. Rights and options are included in
the process of the buying and selling of the agreed price. The limit of the ELD is further
exposed to the exchange risk based on the pre fix price risk. Swaps are instruments which
further allow the swaps of cash flow through a middle process by further working on the
exchange rates where the entire amounts are used accordingly. This is particularly useful for
loans and other such debt financing related options that ELD might opt for to initiate the joint
venture business in the UK. The exchange risk can, therefore, be mitigated using the treat
factor in the risk management framework.
Do Nothing
Managing the financial risk of the business, it is needed to have better risk exposure which is
related to the management is doing nothing. It is needed to eliminate the risk exposure
possibility which is needed to be ascertained in the near future. The termination of the
management framework is referred to as the possibility of the exposure which may take
place in the near future. The risk exposure in that case must be reduced where the financial
obligations of the firm are not met accordingly. The significant strategy to proceed in such a
business where the minimal impact of the risk is mentioned. In case of mitigation of the
overseas risk it must be tied to the severe players which is actually behind the manipulation
of the company. Based on the management techniques of the business it is needed to
eliminate the risk in order to proceed with such kind of business. The risk management
tactics of the business will further help to eliminate the risk and further carry on with the
current business of the organization. The management terminologies will definitely help the
business to meet the outcome of the company based on the significant objectives of the firm.
This, however, would require the company to invest in its human capital and cannot be
mitigated but reduced through proper training and workshops of the parties involved.
Advantages and Disadvantages of risk financing solutions
The risk financing solution have certain advantages and disadvantages with the involvement
of risk along with it. The measures in that case must be adopted by the risk mitigation by
ELD and more analysis in that case is required by the company in order to better understand
the pros and cons. The measurement of risk further helps the upper level management of
the firm to evaluate the pros and cons in the ELD of the company which actually seeks the
measurement of risk financing. The risk financing plays a significant role regarding the
insurance related product of the business. There are also certain risk in some of the
significant business areas where the insurance of the business plays significant role. The
risk must be manipulated by the upper level management of the company and further
implementation of the change will help the management to grow significantly. The insurance
of the products actually covers the potential risk which are associated with the business.
Insurance of the product actually covers the area of the risk mitigation in the business of the
firm. The advantages of using insurance as a risk financing product are that firstly that the
cash outflow is broken down into smaller portions, spread over a very long period. Mostly,
the insurance outflow is infinitely ongoing until the specified event occurs. In case of the
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event occurrence, no matter how low the probability, the insurance company is likely to
cover the maximum of the losses incurred by the client company.
The insurance products are needed by the employees of the company which actually
includes larger amount of premium in the business and does not potentially guarantee that
there will be no loss for the business. The customization of the insurance products will rather
cover the area of the specified business prospects of the company. The products can be
utilized by the business at the time of making up the loss of the business. Furthermore,
another disadvantage of insurance-based products is that it can be very costly. The risk
appetite of ELD is very low, and they are currently already heavily insured. When the cost of
the product is higher than it is needed by the company to increase the insurance of the
business. The sales and revenue generation of the business is complied with the insurance
related products which actually left with the amount of profit for the business. A further
addition to the insurance products, that too involving international business opportunity
would ultimately lead to higher costs that might adversely impact the forecasted sales and
revenue generation, leaving very little to no amount left for profits.
The flexibility of the instruments is further needed to engage the contract which is actually
based on the derivative instruments. The fluctuation which actually takes place in favor of
the company must be identified by the upper level management of the firm. The derivatives
in the option cost are quite redeemable in nature and further options of the cost must be
exercised will further results in the loss. The swap performance may further need to be
maintained at a higher percentage where the depreciation in that case is also needed.
The advantages of the derivatives is further involved in the customization of the contracts
which actually needs to be encountered by the management. The instruments of the
derivatives are rather traded in the market which is actually centralized accordingly. The
involvement of the other parties including the cash flow structure by the process of utilizing
effective flow of cash in the business. The requirement of the special members which
actually creates the synthetic instrument which actually solves the involved parties. The
regularized exchanges and there are also certain disadvantages in the default risk of the
business. The instruments are utilized in the financial engineering which actually and there
are specialized members which actually takes care of the involved parties. The exchange
and instruments are further the disadvantages of the parties which are further involved in the
bargain part of the business. There is flexibility in the customization of the risk which are
associated with the business which are less cost effective.
The method of financing is quite useful for the business to sum up the entire aspects of the
business invest large sums of money in the business which will further diversify the potential
risk associated with the business. It is important to mitigate the risk associated with the
business and further it is needed to ensure that business actually deals with the unwanted
loss or cost associated with the business.
The issues which are associated are incurred in the internal management system of the
company along with the advantages and disadvantages associated in that case. The
decisions in that case are taken by the upper level management of the firm where the losses
in that case are predicted and further optimized. In the relationship of the UK and US there is
actually significant loss incurred to the company which may take place due to the lack of
resources and natural disaster of the company. There should be sufficient backup funds to
recover from disasters and losses. However, there can be no surety as to how much the
potential losses will be. Hence, the disadvantage of this strategy is much greater in
magnitude, especially for a company that actively avoids risk and has a very low-risk
appetite profile.
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Recommended Risk Financing Solution
The risk financing solution of the company actually deals with the proposed combination of
the business for the company ELD. The proposed solution are rather checked by the upper
level management and further the business of the company is regulated accordingly.
The risk associated with the joint venture is actually deals with the own resolution of the
business which would rather ensure that it will rather lead to maximum mitigation of the
proposed risk associated with the business prospects of the firm. The factors which are
associated with the risk tolerance of the firm.
The financial risk is depended on the potential aspects of the losses which actually covers
the significant risk of the firm. As per the conducted analysis it is needed to understand the
significant position of the business progress for the purpose of expansion in the US market.
This allow the ELD in terms of positioning of the business which would rather maximize the
reach in the UK after meeting the sales target.
ELD further deals with the risk financing solution of the firm and further to proceed with the
strategies adopted by the top level management if the company. The insurance regarding
the products of the business in order to manage the risk exposures by utilizing the
derivatives and the financial instruments needed to handle the significant business
prospects. The exchange rates are also considered in the joint ventures and further the
management needs to take care of the default risk exposure in the business. ELD can
effectively benefit from the joint venture and be able to generate positive cash flows from the
partnership. Its international expansion would further enable it to explore different horizons of
investments, diversifying its business across multiple regions. Such a form of business is in
itself a diversified, market neutral investment which seeks to perform effectively overall, even
if in certain regions of the world it does not fare so well.
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References
Journal Articles:
Bing, L., Tiong, R. L. K., Fan, W. W., & Chew, D. A. S. (1999). Risk management in
international construction joint ventures. Journal of construction engineering and
management, 125(4), 277-284.
Pan, Y., & Li, X. (2000). Joint venture formation of very large multinational firms. Journal of
International Business Studies, 31(1), 179-189.
Park, S. H., & Russo, M. V. (1996). When competition eclipses cooperation: An event history
analysis of joint venture failure. Management Science, 42(6), 875-890.
Monios, J., & Bergqvist, R. (2015). Using a “virtual joint venture” to facilitate the adoption of
intermodal transport. Supply chain management: an international journal, 20(5), 534-548.
Mata, J., & Portugal, P. (2015). The termination of international joint ventures: Closure and
acquisition by domestic and foreign partners. International Business Review, 24(4), 677-689.
Websites:
Benefits and Risks Associated with Joint Venture, Link: https://prowsechowne.com/benefits-
and-risks-associated-with-joint-ventures/
Joint Ventures and Business Partnerships, Link:
https://www.nibusinessinfo.co.uk/content/joint-venture-benefits-and-risks
Business Risks: Joint Venture, Link: https://www.allianceforintegrity.org/en/offer/Business-
Risks/Joint-ventures.php
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Glossary of keywords
Analyse
Find the relevant facts and examine these in depth. Examine the relationship between
various facts and make conclusions or recommendations.
Construct
To build or make something; construct a table.
Describe
Give an account in words (someone or something) including all relevant characteristics,
qualities or events.
Devise
To plan or create a method, procedure or system.
Discuss
To consider something in detail; examining the different ideas and opinions about
something, for example, to weigh up alternative views.
Explain
To make something clear and easy to understand with reasoning and justification.
Identify
Recognise and name.
Justify
Support an argument or conclusion. Prove or show grounds for a decision.
Outline
Give a general description briefly showing the essential features.
Recommend with reasons
Provide reasons in favour.
State
Express main points in brief, clear form.
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