Question
A group of companies consist of three huge departments: ABC Bank, Nix Engineers and DEF Clothing. These companies decided to merge and risk management efforts
A group of companies consist of three huge departments: ABC Bank, Nix Engineers and DEF Clothing. These companies decided to merge and risk management efforts have been consolidated and managed in one place. The risk manager of the construction company is now the head of all risk issues for group. The new risk manager is tasked with the need to look the companies exposure to all forms of financial risks. Consider the following scenarios for each division:
ABC Bank is involved in a competitive environment. Customers require a competitive rate of return when the save. Customers taking loans require the lowest possible interest rates to be levied on their loans. Most of loans for housing cover a minimum period of 25-years while others consists of 15-year periods and charged with fixed interest rates.
The Construction Company, based in Namibia, is involved in huge works in Asia & South America. All this time negotiations for contracts are done in advance, and payments are done using local currency. At the beginning of construction work the company demands payment of one-third of the value of the project. The balance is paid in two instalments, equally, when the work is done halfway, and the balance at the time of finalizing the project. The minimum duration for construction contracts is three years.
DEF Clothing secured contracts that require delivery of clothes to two stores in the local market. It takes 10-12 months to deliver products after an order has been initiated. Customers from the store or chains require that clothes be made in tailor made styles, sizes and numbers. The company buys materials and changes them, in its mills, to fabric that is used to make clothing.
Required:
Ascertain the different financial risks faced by each division and explain the manner in which the company can mitigate against them.
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