The main objective of financial risk management is to minimize the potential loss arising from unexpected changes in currency rates, credit, commodities and equities. The risk of price volatility faced is known as market risk. There is market risk in various forms. Although the focus of the volatility of prices or rates, management accountants need to consider other risks such as:
1. Liquidity risk arises because not all financial risk management products can be traded freely.
2. Market discontinuity refers to the risk that the market does not always lead to price changes gradually.
3. Credit risk is the possibility that the other party in contract management resikotidak can meet its obligations.
4. Regulatory risk is the risk arising from public authorities banned the use of a financial product for a particular purpose.
5. Tax risk is the risk that certain hedging transactions can not obtain the desired tax treatment.
6. Accounting risk is the chance that a hedging transaction can not be recorded as part of a transaction that seeks to protect the value.
Why Manage Financial Risk?
The growth of risk management services that quickly shows that management can enhance shareholder value by controlling the financial risk. If the company equal the present value of future cash flows, active management of potential risks can be justified in a number of reasons. Stable earnings reduce the probability of default and bankruptcy risk or the risk that profits may not be able to cover contractual debt service.
The Role of Accounting
Management accounting plays an important role in the risk management process. They assist in the identification of market exposure, quantified the balance associated with alternative risk response strategies, measure the potential risks facing the company against certain, noting certain hedging products and evaluate the effectiveness of the hedging program.
Identification of Market Risk
The basic framework is useful for various types of risks identify market could potentially be referred to as risk mapping.
The role played by accountants in the process of risk management involves balancing the quantification process relating to the alternative risk response strategies. Leih management may prefer to maintain some of the risks involved rather than have to do when the cost of hedging the perceived risk protection higher than the benefits.
Risk Management in the World with a Floating Exchange Rate
In a world of floating exchange rates, risk management include:
1. Anticipation of exchange rate movements
2. Measurement of exchange rate risk faced by companies
3. The design of an adequate protection strategy
4. Preparation of internal risk management control
Forecasting the exchange rate changes
In developing the program exchange rate risk management, financial managers must have information about the possible direction, time, and magnetudo changes in exchange rates. Aware of the previous exchange rate outlook, financial management can develop adequate defensive measures with a more efficient and effective. However, is it possible to predict accurately the movement of currency remains a problem.
If the exchange rate forecasting is not possible or too expensive to do, then the manager
finance and accounting have to adjust their corporate problems in such a way as to minimize the adverse effect of exchange rate changes. This process is known as the management of potential risks.
Management of Potential Risks
Potential for foreign exchange risk arises when the foreign exchange rate changes also change the net asset value, earnings and cash flows of the company.
Potential Risk of Translation
Translational gauge potential risk of exchange rate changes impact on the domestic currency equivalent value of assets and liabilities denominated in foreign currency held by the company.
These strategies include:
1. Balance sheet hedging
2. Operational hedging
3. Contractual hedging
Strategies for Hedging Products
Product contractual hedge is a contract or financial instrument that allows the user to minimize, eliminate, or at least mengalihkanresiko market on the other shoulder.
Forward Foreign Currency Contracts
Currency forward contract is an agreement to send or receive a certain amount of currency is exchanged for domestic currency, at a date in the future, based on fixed exchange rates are referred to as the forward exchange rate.
Future of Finance
A financial futures contract has properties similar to a forward contract. As a case of forward, futures are commitments to buy or deliver a series of foreign currency at a specified future date at a price that has been specified.
Currency option entitles the buyer to buy or sell a currency based on the seller’s specified price on or before the specified expiration date. European type options can be exercised only on expiration date.
Currency swap involves an exchange of present and future of two different currencies based on a pre-determined exchange rate. Currency swaps allow companies to gain access to capital markets can not be obtained before access to a relatively low cost. Swap is also possible for companies to hedge against exchange rate risks arising from international business activities.
FASB issued FAS No.. FAS 133 is clarified through 149 in April 2003, transform and provide a single approach that kompherensif on accounting for derivatives and hedging transactions. No IFRS. 39 contains the newly revised guidelines for the first time provide universal guidance on accounting for financial derivatives. Before the two standards made global accounting standards for the products of incomplete and inconsistent developed gradually.
Although the guiding rules issued by the FASB and IASB have a lot to clarify the recognition and measurement of derivatives, there are still some problems. The first relates to the determination of fair value. Wallance says there are 64 possible calculations to measure the change in fair value of the risk being protected and the value of hedging instruments.
Speculate in Foreign Currencies
Accounting treatment for foreign currency instruments to be discussed is similar to treatment for forward contracts. The accounting treatment described here is based on the nature of the hedging activities is whether the company’s commitment to protect the value of derivatives, the transaction will occur, the net investment in foreign operations, and so forth.
Analyzing the potential impact of derivative contracts are reported on the performance and characteristics of the rumor of a company is difficult. Disclosures required by FAS 133 and IAS 39 has more or less solved this problem.
Disclosure, among others:
1. Objectives and risk management strategies for hedging transactions
2. Description of the items hedged
3. Identification of the market risk of the posts which the hedged item
4. Description of the hedging instrument
5. Amount not included in the assessment of hedge effectiveness
6. Initial justification that the hedging relationship will be very effective to minimize the risk of market
7. Runs on hedge effectiveness assessment of the actual value of all derivatives that are used during the period
The finer points of Financial Control
Performance evaluation system proved useful in various sectors. These sectors include but are not limited to the corporate treasury, purchasing and overseas subsidiaries. Control of the treasury company-wide performance measurement program include exchange rate risk management, hedging is used to identify and report the results of the hedge. The evaluation system also includes documentation on how and to what extent the company tresury help other business units within the organization.
The object of risk management is to achieve a balance between risk and cost reduction. Thus the proper standard by which to judge the actual performance is a necessary part of any performance appraisal system. This should make clear reference section at the beginning before the creation and protection program should be based on the concept of opportunity cost.
Financial risk reporting system should be able to reconcile the internal and external reporting systems. Risk management activities have a future orientation. But in the end they have to reconcile with the measurement of potential risk and account-akunkeuangan for external reporting purposes.
Source of: Federick DS Choi and Gary K.Meek.2005.Akuntansi internasional.edisi Salemba kelima.jakarta-four.