Risk Management Strategies -Opportunities and challenges-Final
Post on 08-Feb-2017
5 Views
Preview:
Transcript
Risk Management in Cotton Industries : Opportunities and Challenges
Md. Nazrul Islam, CERM
Joint Director Banking Regulation and Policy
DepartmentBangladesh Bank –the central Bank
of Bangladesh
Outline
Risk
Risk Management Process
Risk Measureme
nt
Risk Management Strategies
Shareholders Value
1. Who is Risk Taker ? First one , Second one or Both ?
What is Risk ?
A risk is a ‘hazard, danger, chances of loss or injury, degree of probability of loss, Person, factor or thing likely to cause danger, to incur the chances of unfortunate consequences by doing something’
-The Chambers Dictionary
What is Risk ?R=ʄ(hazard*vulnerability )
Hazard is probabilistic
Vulnerability is non-probabilistic
Thus Risk is Probabilistic
As Exposure to uncertain Events
Strike in Shipment Ports Flood Drought In Cotton Growing AreasDefault on Contractual obligation by a buyer or supplier Fire in Cotton WarehousePoor Quality of Cotton CropSharp Increase in cotton price
Factors associated with term RISK
Uncertainty Cause of loss and
Level of Loss
Frequency and
severity
A Ship is safe in harbor…………….
Necessity Knows no law
Risk Management Process
Monitor and R
eview
Identify Risk
Analyze Risks
Evaluate Risks
Establish Context
Treat Risk
Risk Assessment
Com
municate and C
onsult
Strategic Process Commit and
Mandate Communicate and Train
Structure and Accountability Review and
Improve
Stra
tegi
c Pr
oces
s
Stra
tegi
c Pr
oces
s
Strategic Process
Risk Map
Seve
rity
Probability
High
High
Low
Source Risk
Country Risk Exchang
e Risk
Price Volatility
Risk Counter
Party Risk
Global Economic Slowdown Interest
Rate Risk
Operational Risk
(Knowledge Gap)
Covenant Risk
Reputational Risk
The Process for effective Risk Management
Transfer
Better Cost Control
Collateral Management
Purchase of Insurance
Manage /Internalize Avoid /Transfer
Accept Share/ Transfer
Objectives
1. Risk Analysis
Severity Probability
High
High
Low
2. Mitigation
Retain
Transfer3.
Monitor4. Review
Negative
Positive
Internal
External
Environmental Assessment and Strategic move : SWOT Analysis
Strength•Skilled and Lower Wage Human Resources• Export Contribution- 81.70% and GDP-13.10%•Forward looking Govt. & Banking Policy • Reputed Entrepreneurship •Advanced Technology•Prompt Customer Services•Innovative Products•increased mobile and Online Banking service
Weaknesses• Practice of commodity Market and Associated Risk • Non-availability of Risk Management Tools• Less Local Production of Cotton (2% of Total)• Interest rate Risk • Poor Infrastructure and Red tapes •Unrest Political situation
Opportunities• Overseas New Cotton Market • New product development• Highly market focused •High Demand of Finished Product
Threats• Cotton Source Risk • Sustainable Cotton Trading • Volatility of Raw Cotton Price •Country risk- new act & law by government•Exchange rate risk•Economic slowdown or global recession Identify
SupportCapitalize
Invest
12
Types of Corporate Risk Faced
Business Risk
• a) Commodity Risk:
• Price Risk: Price Fluctuations
• Quantitative Risk : Natural Calamity, weather etc.
• b) Concentration Risk :
• c) International Operations Risk
Financial Risk
• a) Credit Risk
• b) For-ex Risk
Operational Risks
Commodity Risk
Reasons Change in inventory Value
Inflation Leading to – Increase in Production –infrastructure cost and production raw materials cost
Change in selling price fluctuations
Commodity Risk Countering the Risk : Hedging
Making an Investment to reduce the risk of adverse price movement in an asset
Prediction: A farmer predicts price will go down from Tk. 72/kg (Spot price-oct) to tk. 65/kg(spot price dec)
Hence, the farmer sells a december 20th futures contract at tk.72/kg
Present Price tk.
72/kg
Future Tk. 65/kg
Buy Futures of dec@65
Turnover: 65
+7=72
Future Tk. 80/kg
Buy Futures of dec@80
Turnover: 80-8=72
Spot 1st Decemb
er
Bangladesh Bank Policy: Foreign Exchange Guidelines Vol-1Sec-3
Hedging the price risk of Commodities
AD can hedge the price risk of commodities that are traded on the exchanges or OTC
Subject to prior Approval No Speculation is permitted AD must have ability to monitor credit
or market risk
Counterparty risk
Non performing of Contract
Cotton Supplier not shipping when cotton prices increase sharply
Customers not opening L/C when cotton prices dropCotton
Industry and its
associates
Operational risk
People
Unexpected losses due to physical catastrophe
Fraud , Documentation
Reputation
Failure of management
Internal process errors
Unforeseeable external events.
Cotton Industry and its
associates
1.Field
Risk : supply chain of cotton
4.Port
5.Warehouse6.Buyer (PTS-Spinner/Rotor)
3.Warehouse2.Ginn
Risk Measurement
Methods •Measure uncertainty or Volatility based on historical Data
•VAR is for measuring Market risk (price, Basis, currency )
Methods
•Stress Testing•Back testing
Insurance Options
Cotton Traders
Property All Risks
Money In
Transit
Non-delivery or Non Paymen
t War at Sea or on land or
terrorism
Comprehensive Cargo
Insurance
Strike or Riot, Civil commotio
n or Malicious Damage
Risk Framework
Identification of risk Risk Control Process and ProceduresRisk Limits and Risk Cap Allocation Risk Capture, Measurement and reporting Aligning System-PMS & Annual Incentives
Governance Structure
Segregation of Duties
Bangladesh Bank Initiatives
Business Process InnovationAnd As per Foreign Exchange Guidelines (Ch-7)-34 Payment of Import Liability
Show Cause/Imposing Fine for Delay Payment –Punitive Action including
revocation of AD licence by BB
Exit Plan has been asked to submit by 31 January, 2017.
Major Risk Management Strategies
•Gain Knowledge in International Trading Practices' and risk Management
•To operate ICA rules and by laws. •Work with International Org.(WTO, ICA, ICAC)
Sustainability in Cotton Trading and sanctity of
contracts
•Backward linkage and efficient worker Cost Reduction Strategy, Labor Productivity
Improvement New Market or
Product development Strategy
•Research on new product , Development and Market
Product & Market Diversification
Strategy
Diversify Product effectively Diversify Market efficiently
•People Ask Difficult questions •People Admit Ignorance •Whistle Blowing( Public
interest disclosure) is encouraged
•Performance evaluation of business and people are based on Risk Adjusted Returns and not on absolute profit levels
Developing Risk Culture
•Implement Sound Risk management & Risk Governance
•Maximization of Share Holders Value Sound Risk
Management and
Governance
Risk Management Strategies cont.
Reference
1. Export Promotion Bureau , Bangladesh 2. The Financial Express, 08 October, 20123. www. bgmea.com.bd4. Cotton Exporters Guide August 2013, ITC4. www.mckinsey.com
Q/A ?
Thank youMd. Nazrul Islam
Joint DirectorBanking Regulation and Policy Department
Bangladesh Bank, Dhaka-1000.
Email: mdnazrul.islam@bb.org.bdwebsite: www.nazrulin.com
Contact No. 88-01552494409
top related