Financial strategy Coursework Example | Topics and Well Written Essays - 1500 words

Financial strategy - Coursework Example Since, the two world wars and lot of scientific inventions, risk has been defined in many ways. When we go to the bus stand for the bus, various degree of risk is involved having different severity of accidents. Sometime risks may be voluntary or some risks may be trivial while other may be fatal. It may be argued that since the birth of civilization only risks have been responsible for any major advancement. In ancient times, risk taking cavemen lived with abundance of food and risk averse starved to death. In terms of financial theories and practice the risk management is equating risks with hedging. Organizations prosper not by avoiding risks but by managing risks to their own advantage. Ancient trade across the continents flourished because of risk taking and management. The key reason for Europe’s prosperity is risk management. In 1921, Frank Knight summarized the difference between risk and uncertainty with an example. â€Å"Two individuals drawing from an urn of red an d black balls; the first individual is ignorant of the numbers of each color whereas the second individual is aware that there are three red balls for each black ball. The second individual estimates (correctly) the probability of drawing a red ball to be 75% but the first operates under the misperception† (Knight 1921). ... Risks provide opportunities for a good outcome out of a bad situation. If the reward outmatches the hazard of disaster, people are ready to take risks. If a firm is conscious of the risks it is undertaking, it is going to formulate strategies based on the decision. The Institute of International Finance (December 2009) has defined risk culture as â€Å"as the norms and traditions of behavior of individuals and of groups within an organization that determine the way in which they identify, understand, discuss, and act on the risks the organization confronts and the risks it takes† (2009). It is essential that the risks are challenged by the core group of decision makers with an objective to develop a spirit of nurturing buoyancy and inculcating an environment for continuous improvement, in line with the strategic aims of the organization. Business risk is related to political and social environment of a country. During the war on terror and US attack on Iraq, the air travel bec ame very risky and the insurance cost and cost of flying were many times higher than the previous prevailing rates. Similarly, in today’s world condition in Afghanistan is a threat for any kind of manufacturing business. Thus, no company would like to establish a factory in Afghanistan. Therefore, we observe that a lot of trading is going on these days in this region of the world. The uncertainty of terrorism has created a status of risk in almost the entire world for the last couple of decades, more appropriately since US invasion of Iraq. As a result of risk investment has moved out from this region. Despite the fact the countries in these regions are offering business incentives to the investors but in view of the high risk for capital and life,