Financial Risk Management Strategies Research Articles

Fuzzy Analysis of Financial Risk Management Strategies for Sustainable Public–Private Partnership Infrastructure Projects in Ghana

Public–private partnership (PPP) is a prominent tool for sustainable infrastructure development. However, the positive contributions of PPPs toward the attainment of sustainable, climate resilience and zero-carbon infrastructure projects are hampered by poor financial risk management. This problem is more prevalent in developing countries like Ghana where private investment inflow has plummeted due to the COVID-19 recession and poor project performance. Thus, this study aims to assess the key financial risk management strategies in ensuring sustainable PPP infrastructure projects in Ghana. The study utilised primary data from PPP practitioners in Ghana solicited through survey questionnaires. Factor analysis, mean scores and fuzzy synthetic analysis are the data analysis techniques for this study. The results revealed that sustainable and green funding models, effective cost-reduction initiatives, a competent team with committed leadership and emerging technologies and regulations constitute the key strategies for managing the financial risks of sustainable PPP infrastructure projects. Although future studies must expand the scope of data gathering, the findings of the study enrich the theoretical understanding of financial risks in sustainable investments in PPP infrastructures. Relevant remedies that will aid the development of practical financial risk management guidelines are also provided in this study for PPP practitioners.

The Influence of Risk Management Practices on Financial Market Stability: Insights from Lebanon

This research investigates the relationship between various risk management practices, including diversification, hedging, and contingency planning, and their impact on the dependent variable, financial market volatility. The study is based on a sample size of 127 observations in the context of Lebanon's financial markets. The primary objective of this research is to analyze how risk management practices employed by financial institutions and market participants affect the stability of Lebanon's financial markets. To achieve this, the study employs a quantitative approach, utilizing statistical analysis and regression modeling to assess the relationships between the independent variables (risk management practices) and the dependent variable (financial market volatility). The independent variables in this study encompass risk management practices, namely diversification, hedging, and contingency planning. These practices are crucial components of financial risk management strategies employed by institutions and investors. By examining their influence on financial market stability, this research aims to provide insights into effective risk mitigation strategies within the Lebanese financial context. The decision of Lebanon as the study's context is significant due to the unique economic and geopolitical challenges faced by the country. The financial markets in Lebanon have been subject to various external and internal pressures, making the analysis of risk management practices particularly relevant. The sample size of 127 observations allows for robust statistical analysis, ensuring the validity of the findings. The research findings are expected to contribute to the existing body of knowledge on risk management and financial market stability, with potential implications for policymakers, financial institutions, and investors operating in Lebanon and similar emerging market economies.

Navigating Uncertainty: Assessing the Impact of Financial Risk Management on Organizational Performance: Evidence from Insurance Companies in Pakistan

In an era marked by economic volatility and global uncertainties, the effectiveness of financial risk management strategies is crucial for businesses, particularly in the financial services industry. This research investigates the relationship between financial risk management (FRM) practices and organizational performance, specifically within the insurance sector in Pakistan. Moreover, the study aims to explore the role of financial risk management in enhancing the performance of insurance companies operating in the Pakistani market. It establishes a research model based on Financial Risk Management (Market Risk, Operational Risk, Liquidity Risk, and Legal Risk) and Organizational Performance (ROE). Researchers surveyed 13 insurance companies in Pakistan using non-probability and convenience sampling techniques and analyzed the data using EViews. The results indicate a significant and meaningful link between organizational success and financial risk management. This study seeks to incorporate best practices and focuses on developing a comprehensive understanding of the influence of organizational performance and financial risk management strategies.

Strategic Formulations and Financial Distress: Insights from Sales Growth and Profitability Ratios

This research looks into the complex relationship between sales growth, profitability ratios, and financial difficulty in businesses. It aims to provide practical recommendations to firm management for using sales growth and profitability data to identify and avoid financial crisis. Using a quantitative method, secondary data obtained from publicly traded companies' financial statements over a specific time period forms the basis of research. Multiple linear regression models are used to examine the relationship between sales growth and profitability ratios (the independent variables) and financial distress (the dependent variable). Statistical tests, such as ANOVA and t-tests, are used to assess the model's significance and regression coefficients. The findings show a significant relationship between sales growth, profitability ratios, and financial difficulty. Higher sales growth, in particular, is associated with an increased likelihood of financial trouble, as evidenced by the positive coefficient. Similarly, an increase in profitability ratios is linked to a higher probability of financial difficulty. This emphasizes the importance of sales growth and profitability ratios as signs of financial crisis. It is recommended that firm management closely monitor these indicators and include them into the company's financial risk management strategy in order to anticipate or mitigate possible financial difficulties. This study provides diverse stakeholders with critical insights and tools for efficiently understanding, identifying, and managing financial risks.

Financial risk management strategies of small to medium illicit drug enterprises: considering low-level money laundering

AbstractThe illicit drug trade generates billions of dollars in revenue per year, much of which comes from wholesale and retail sales late in the supply chain. Yet, the methods retailers and low-level wholesalers use to launder this revenue remain poorly understood. Using in-depth interviews with illicit drug entrepreneurs in the United States and the United Kingdom, this article analyses laundering strategies among such market actors. Our findings indicate that a significant proportion of their illicit proceeds are disposed of through relatively small-scale ‘everyday’ cash transactions (< $1,000) that are effectively untraceable. For those generating more substantial revenues, a variety of accessible and uncomplicated laundering strategies are employed, such as reporting such revenues as taxable income, using proxies to launder funds, and using revenues as investment capital within small-scale legal enterprise. Ultimately, we identify uncomplicated, yet largely effective, methods of laundering criminal proceeds amongst our sample of low- to medium-level illicit drug sellers. Though the sums at an individual level are relatively trivial, the ‘mass of minor offences’ of this nature likely accounts for a significant share of laundered drug revenues in Western consumer drug markets.

Technology-Based Financial Risk Management Strategy: Overview of Recent Developments

Technological developments have had a significant impact on financial risk management. In this context, the application of artificial intelligence, the use of data analytics, and the role of blockchain technology are the main focus for increasing efficiency and accuracy in managing financial risks. This study aims to analyze technology-based financial risk management strategies with a focus on the application of artificial intelligence, the use of data analytics, and the role of blockchain technology. This research was conducted using a qualitative approach with a literature study as a research method. The data used comes from the results of previous research and studies that are related to technology-based financial risk management. This study found that technology-based financial risk management provides advantages in the form of operational efficiency, cost savings, and increased accuracy in risk analysis. However, challenges such as data security and privacy and the complexity of technology system integration must be overcome. In developing an effective technology-based risk management strategy, companies need to increase organizational understanding and awareness, develop a supportive regulatory framework, and conduct human resource skills training. Collaboration, continuous evaluation, and a sustainable approach are also keys to success in optimizing the use of technology in managing financial risks.

A Study on Risk Management Strategies

This research paper explores the significance of risk management practice and corporate hedging strategies in achieving financial stability and resilience for organizations. The study emphasizes the need for comprehensive risk identification, assessment, and mitigation to navigate uncertainties and capitalize on opportunities in today's complex business landscape. The paper highlights the multifaceted nature of risks that organizations face, including economic factors, regulatory changes, technological advancements, natural disasters, and cybersecurity threats. It emphasizes the importance of risk management in various sectors, such as individuals, businesses, and governments, to protect interests and ensure long-term success. Enterprise Risk Management (ERM) is discussed as a holistic approach that considers the interdependencies and cumulative effects of risks across functional areas and business units. The research delves into risk identification, assessment, and quantification, as well as the implementation of appropriate risk response measures to mitigate potential impacts. Furthermore, the study explores the concept of corporate hedging as a financial risk management strategy to protect against adverse market fluctuations. It discusses various hedging instruments and their role in offsetting potential losses or gains from currency exchange rates, interest rates, commodity prices, and other market variables. The benefits of effective risk management and corporate hedging are examined, including financial predictability, enhanced competitiveness, and improved access to financing. The research highlights the importance of fostering a risk-aware culture, establishing robust governance frameworks, and continuously monitoring and reporting on risks. Overall, this research paper emphasizes the importance of proactive risk management and corporate hedging strategies in safeguarding organizations' financial stability, ensuring resilience, and facilitating informed decision-making in an ever-changing business environment.

Risk Aversion and Perception of Farmers about Endogenous Risks: An Empirical Study for Maize Producers in Awi Zone, Amhara Region of Ethiopia

Agriculture is a risky business that is subject to endogenous risks. Endogenous risks caused by input utilization, input affordability and input availability may prove detrimental to the production potential of farmers. The study was aimed at examining the risk perception, risk aversion and risk management strategies of maize producers in Awi zone, which is found in the northwest part of Ethiopia. The study involved 343 respondents who produced maize under risk. Descriptive statistics, a seven-point Likert scale, the observed economic behaviour method, factor analysis and a seemingly unrelated regression model were used to process the data. The results showed that farmers have different perceptions of the endogenous risk associated with input availability and input affordability which has a different probability of occurrence and severity of damage. The observed economic behaviour method showed that farmers in the area also have different risk aversion behaviours: about 7.29% of the respondents in the study area have high risk aversion attitudes, while about 30.61% have medium risk aversion attitudes and 62.10% of them have low risk aversion attitudes. The seemingly unrelated regression model output showed that farmers’ economic, social, demographic and institutional factors, as well as their risk behaviour, determine the risk management strategies that they employ. Maize farmers in the area applied human risk management strategies, production risk management strategies, diversification, financial risk management strategies and marketing risk management strategies to tackle the endogenous risks in the area. It was deduced that maize farmers have a risk averse behaviour even if their risk aversion levels differ based on the scope of the management strategies that they employ to combat risk. Following the finding of the study, a holistic approach to risk management that encompasses all actors, such as farmers, researchers, extension services and financial institutions should be involved to make the appropriate interventions.

Hedging Effectiveness as an International Financial Risk Management Strategy

In the dynamic landscape of global finance, businesses face intricate challenges navigating international markets, necessitating robust risk management strategies. This explores the evolution of hedging as a crucial financial maneuver originating from the 20th-century financial upheavals. Hedging, strategically responding to market fluctuations, has transformed into a sophisticated risk management tool, requiring a nuanced understanding of market dynamics. It serves as a financial shield, particularly in the face of currency fluctuations and interest rate volatility for multinational corporations. The symbiotic relationship between theoretical underpinnings and practical application becomes evident as the narrative unfolds. The story emphasizes the complexities and challenges of financial markets, highlighting the need for strategic and proactive responses. The effectiveness of hedging is portrayed not as a one-size-fits-all solution but as a philosophy ingrained in decision-making processes for businesses operating globally. Real-world case studies dissect the successes and failures of companies employing hedging, bridging theory and application. Hedging is portrayed not as a static set of practices but as a dynamic philosophy adapting to technological advancements. The integration of sophisticated algorithms and artificial intelligence transforms risk management, enabling more precise, agile, and adaptive hedging approaches.

ARX-GARCH Probabilistic Price Forecasts for Diversification of Trade in Electricity Markets—Variance Stabilizing Transformation and Financial Risk-Minimizing Portfolio Allocation

In this paper, we propose dynamic, short-term, financial risk management strategies for small electricity producers and buyers that trade in the wholesale electricity markets. Since electricity is mostly nonstorable, financial risk coming from extremely volatile electricity prices cannot be reduced by using standard finance-based approaches. Instead, a short-term operational planing and a proper trade diversification might be used. In this paper, we analyze the price risk in terms of the Markowitz mean–variance portfolio theory. Hence, it is crucial to forecast properly the variance of electricity prices. To this end, we jointly model day-ahead and intraday or balancing prices from Germany and Poland using ARX-GARCH type models. We show that using heteroscedastic volatility significantly improves probabilistic price forecasts according to the pinball score, especially if variance stabilizing transformation is applied prior to a model estimation. The price forecasts are then used for construction of dynamic diversification strategies that are based on volatility-type risk measures. We consider different objectives as well as a buyer’s and a seller’s perspective. The proposed strategies are applied for the diversification of trade among different markets in Germany and Poland. We show that the objective of the strategy can be achieved using the proposed approach, but the risk minimization is usually related to lower profits. We find that risk minimization is especially important for a seller in both markets, while for a buyer a profit maximization objective leads to a more optimal risk–return trade-off.

The Impact of Financial Risk Management Strategies on Firm Market Competitiveness

The Impact of Financial Risk Management Strategies on Firm Market Competitiveness

ТРАНСНАЦІОНАЛЬНІ КОРПОРАЦІЇ ТА ЇХ РОЛЬ У ФОРМУВАННІ СТРАТЕГІЙ УПРАВЛІННЯ ФІНАНСОВИМИ РИЗИКАМИ

The article reveals the role of transnational corporations (TNCs) in the modern globalized world and their influence on the formation of financial risk management strategies. The main focus is on the methods and tools that TNCs use to minimize potential losses and optimize profitability, namely: hedging, diversification, insurance, creation of reserve funds and the use of modern technologies. The article emphasizes the importance of a systematic approach to risk management to ensure the long-term stability and competitiveness of TNCs at the international level. Emphasis is placed on how globalization and growing international competition require TNCs to better understand and adapt to financial challenges. Special attention is paid to the impact of modern technologies on risk management processes, including automation, analytics and forecasting. It highlights how MNCs can use these technologies to improve their efficiency, ensure financial stability and strengthen the confidence of shareholders and investors. Ultimately, the article highlights the importance of an innovative approach to financial risk management in the ever-changing and uncertain global business environment. Case studies and case studies are reviewed, demonstrating how leading MNCs have dealt with specific financial challenges and what strategies they have used to ensure their profitability and growth. Through these examples, readers are provided with a deeper understanding of the real-world application of theoretical concepts in the field of risk management. Future trends in the field of financial risk management are indicated, in particular, the role of artificial intelligence, blockchain and other advanced technologies that can radically change the approach to financial planning and analysis. It is emphasized that the success of modern TNCs largely depends on their ability to adapt to rapidly changing market conditions, using innovative strategies and technologies for effective financial risk management.

Financial risks of sustainable development of small agricultural enterprises assessed to ensure national food security

Assessing, monitoring, and managing the financial risks of small agribusiness enterprises under conditions of economic crisis and sanctions is a complex problem. Despite a state support for agriculture, sustainable development of small and medium-sized entrepreneurship in these periods is complicated by agro-economic risks in addition to growing risks of owner’s equity to mitigate the threats to solvency and financial stability, resulting in bankruptcy of small enterprises (SME). The state support mitigates these risks, but the risks do not decrease. Therefore, an important condition for stable and efficient functioning of small agricultural enterprises that considerably contribute to food security and self-sufficiency in Russia is monitoring risks of their financial security, which necessitates methodological approaches to their assessment at the micro level. Despite practical interest of agricultural producers in assessment tools and financial risk management strategies that have a key impact on their overall performance, there is a lack of scientific publications that represent new methods and algorithms for assessing financial risks in agriculture, suitable for practical use by small enterprises. The presented in the article procedure for integrated assessing the total financial risk of sustainable development of small agribusiness enterprises is based on identification and analysis of the risk components and is distinguished by a multifunctional nature and acceptable requirements.

What Drives Derivatives: An Indian Perspective

This study investigates the determinants for the use of derivatives by firms in the Indian market. Using a sample of 433 firms listed in the National Stock Exchange (NSE) in India for the period 2013–2018, we find that firm size, debt to equity, turnover, price–earnings ratio and the magnitude of international transactions are significant influential drivers responsible for pushing the firm to use derivatives for risk management. The findings also document that the financial distress of the firm, which is one of the important reasons for the use of derivatives in advanced economies, happens to be insignificant when it comes to developing countries like India. Using logistic regression, it is observed that highly levered firms condense the use of derivatives as part of a financial risk management strategy, which contradicts existing literature. All other findings are generally consistent with the theory of derivatives as well as with international evidence.

Integrating Physical and Financial Approaches to Manage Environmental Financial Risk on the Great Lakes

AbstractPhysical and financial approaches each provide different benefits for managing environmental financial risks. Index insurance contracts, a financial approach, have been proposed for managing numerous environmental financial risks. A method for testing when and how physical (dredging) and financial risk management strategies (index insurance) could be deployed in tandem to maximize improvements in utility for commercial shippers on the Great Lakes is developed using principles from the benefit‐cost analysis and expected utility theory. Using a utility function with a decreasing marginal utility of income explicitly models the risk aversion of commercial shippers. The probabilistic nature of future revenue and costs is modeled and combined with the utility function to determine a Net Option Value. This value represents the maximum amount commercial shippers would pay more than the cost for reduced variability in net revenues. Results indicate that while the Net Option Value for dredging exceeds the potential benefits of using insurance contracts alone, the combination of dredging and insurance can improve overall utility with less cost than dredging alone. The strong autocorrelation in lake levels over long periods reduces the value of index insurance, such that the results show a potential lower bound of the value of combining physical and financial approaches in highly variable systems.

Fractal Asset Pricing Models for Financial Risk Management

The article presents the analysis findings of the problems and prospects of using the fractal markets theory to mathematically predict the price dynamics of assets as part of a financial risk management strategy. The aim of the article is to find out the features of value of bank assets and to develop recommendations for assessing financial risks based on mathematical methods for forecasting economic processes. Theoretical and empirical research methods were used to achieve the aim. The article reveals the features of mathematical modeling of economic processes related to asset pricing in a volatile market. It was proved that using financial mathematics in banking contributes to the stable development of the economy. Mathematical modeling of the price dynamics of financial assets is based on a substantive hypothesis and supported by an adequate apparatus of fractal pair pricing models in order to reveal specific market relations of business entities. According to the authors, the prospects of using forecast models to minimize the financial risks of derivative financial instruments are positive. The authors concluded that the considered methods contribute to managing financial risks and improving forecasts, including operations with derivatives. Besides, the studied fractal volatility parameters proved the predictive power regarding extreme events in financial markets, such as the bankruptcy of Lehman Brothers investment bank in 2008. The relevance of the article is due to the fact that the favorable investment climate and the use of modern financing methods largely depend on the effective financial risk management.

EFFECT OF FINANCIAL RISK MANAGEMENT ON FINANCIAL PERFORMANCE OF FIRMS LISTED IN THE NAIROBI SECURITIES EXCHANGE

Purpose: The main purpose of this study was to determine the effect of financial risk management on financial performance of firms listed at the Nairobi Securities exchange.Methodology: The study employed descriptive design. The target population for the study was all the chief financial officers of all the 61 listed firms at the Nairobi Securities Exchange. The study employed a census survey of the 61 CFO’s of the listed firms at the NSE. The study utilized a semi-structured questionnaire to collect primary data. . The collected data was coded into SPSS 23 for subsequent descriptive and inferential statistics. Descriptive statistics was presented through frequencies, percentages, means and standard deviation. The inferential statistics was presented using regression model summary and correlation coefficients. The findings were further presented using charts and tables.Results: The findings of the research showed there was a positive and significant association between financial risk management strategies as evidenced by the coefficient of determination R2 = .205. The results of the study further indicated that asset structuring management and risk avoidance practices had a positive and significant influence on financial performance. The study concluded that with proper asset structuring management practices a firm can improve its performance on the stock exchange. Further the research findings showed that risk avoidance practices can positively enhance the financial profitability of listed firms.Unique Contribution to Theory, Policy and Practice: The study recommends that listed firms should enhance their financial risk management practices to be in tandem with growing international standards and globalization. The study also recommends that the regulatory authorities should establish policies laws that take note of the risks that company take and provide them with certain incentives on the bourse.

Effects of Geographic Diversification on Risk Pooling to Mitigate Drought‐Related Financial Losses for Water Utilities

AbstractAs the costs and regulatory barriers to new water supply development continue to rise, drought management strategies have begun to rely more heavily on temporary conservation measures. While these measures are effective, they often lead to intermittent and unpredictable reductions in revenues that are financially disruptive to water utilities, raising concerns over lower credit ratings and higher rates of borrowing for this capital intensive sector. Consequently, there is growing interest in financial risk management strategies that reduce utility vulnerabilities. This research explores the development of financial index insurance designed to compensate a utility for drought‐related losses. The focus is on analyzing candidate hydrologic indices that have the potential to be used by utilities across the US, increasing the potential for risk pooling, which would offer the possibility of both lower risk management costs and more widespread implementation. This work first analyzes drought‐related financial risks for 315 publicly operated water utilities across the country and examines the effectiveness of financial contracts based on several indices both in terms of their correlation with utility revenues and their spatial autocorrelation across locations. Hydrologic‐based index insurance contracts are then developed and tested over a 120 year period. Results indicate that risk pooling, even under conditions in which droughts are subject to some level of spatial autocorrelation, has the potential to significantly reduce the cost of managing financial risk.

FINANCIAL RISK MANAGEMENT STRATEGIES AND THE GROWTH OF MICROFINANCE SECTOR IN KENYA

Purpose: The purpose of this study was to investigate how financial risk management strategies lead to growth of MFI sector in Kenya.Methodology: The study adopted a correlation survey research design. The population of this study was fifty seven (57) MFIs. The sampling frame was the list of MFIs provided in the AMFI website www.amfikenya.com. A sample of thirteen (17) MFIs was selected using the random sampling approach. A questionnaire and an interview schedule were the main data collection tools. Qualitative data was analyzed using content analysis whereas the quantitative data was analysed using Statistical Package for Social Sciences (SPSS) where descriptive and regression analysis were conducted to determine the relationship between enterprise risk management strategies and growth of MFIs.Findings: The findings indicated that MFIs had effective financial risk management strategies such as effective credit risk management practices, liquidity risk management practices, interest risk management practices and price risk management practices. In particular, MFIs took into consideration the conditions, characters, capacity, collateral and capital of borrowers. Strict debt collection practices were widely adopted by MFIs. In addition, the concept of Know Your Customer (KYC) policy, seem to have been adopted by MFIs. The relationship between financial risk management strategies and growth was positive and significant. It also shown that sources of funds for MFIs include external sources and internal sources and the most frequently used source of funds are bank loans. The use of banks loans may present various risk exposures to MFIs, the most significant being interest rate risk. However, the ability of MFIs to source funds from various sources indicates that MFIs can apply the pecking order by first exploiting internal sources of funds since they present a lower financial risks and then move on to external sources. However, despite the financial risk exposure accompanied by leverage from external sources, MFIs may also benefit as they may experience higher growth driven by the leverage. It was also found that MFIs had put in place a number of good practices that had emerged to promote responsible and inclusive lending. These include loan size limits, standardized (simple) loan terms, zero tolerance on delinquency, group-based lending. This finding implies that MFIs have put in place effective credit risk management policies which are part of an overall financial risk management strategy. The existence of effective financial risk management practices may have influenced the growth of MFIsUnique contribution to theory, practice and policy: The study recommends that the MFIs to continue practicing effective financial management practices as this would improve the growth of MFIs.

Evaluating financial risk management strategies under climate change for hydropower producers on the Great Lakes

AbstractHydropower on the Great Lakes makes up a substantial fraction of regional electricity generation capacity. Hydropower producers on the Niagara River (flowing between lakes Erie and Ontario) operate as run‐of‐river, and changing lake levels alter interlake flows reducing both generation and revenues. Index‐based insurance contracts, wherein contract payouts are linked to lake levels, offer a tool for mitigating this risk. As a potentially useful tool, pricing of financial insurance is typically based on historical behavior of the index. However, uncertainty with respect to the impacts of climate change on lake level behavior and how this might translate to increased (or decreased) risk for those selling or buying the insurance remains unexplored. Portfolios of binary index‐insurance contracts are developed for hydropower producers on the Niagara River, and their performance is evaluated under a range of climate scenarios. Climate Informed Decision Analysis is used to inform the sensitivity of these portfolios to potential shifts in long‐term, climatological variations in water level behavior. Under historical conditions, hydropower producers can use portfolios costing 0.5% of mean revenues to increase their minimum revenue threshold by approximately 18%. However, a one standard deviation decrease in the 50 year mean water level potentially doubles the frequency with which these portfolios would underperform from the perspective of a potential insurer. Trade‐offs between portfolio cost and the frequency of underperformance are investigated over a range of climate futures.