Professional Documents
Culture Documents
Understanding Exchange Rates Making sense of Forex • 1997 Asian Financial Crisis
(series of currency devaluation among Asian countries—starting in Thailand). USD
appreciation led to the appreciation of currencies pegged to the USD to appreciate also
(—not sustainable, resulting in high inflation, economic crisis).
• Talks about Chinese using currency devaluation as a strategy amid the potential US-
China Trade War (i.e., boost competitiveness (exports), shrink trade deficits (NX),
reduce debts in the long run).
Understanding Exchange Rates Lecture Outline • Part 1 (What is Foreign Exchange?) •
Why do we have Foreign Exchange and Foreign Exchange Market?
• Key Terms
• Why is it important?
• Part 2 (Exchange Rate Movements) • Exchange Rate Regimes
• Determining Exchange Rates in the Long Run
Understanding Exchange Rates
• Foreign Exchange (Forex) is the trade of one currency to another.
• Facilitation of international exchanges in the pretext of the increasing degree of
economic interdependence (i.e., interstate trades and economic integration, such as the
Association of Southeast Asian Nations (ASEAN)).
• It facilitates through Exchange Rates. Exchange Rate is the price of a unit of foreign
currency in terms of the domestic currency.
• US: USD1= PHP50
• EU: €1= PHP58
Understanding Exchange Rates
Understanding Exchange Rates
• Foreign Exchange Market is where currencies are bought and sold and exchange rate
is determined*.
• Centralized vs OTC markets
• Currency Appreciation/Depreciation implies that a currency has increased/ decreased
in value relative to another currency (usually compared to the USD).
*Depends on the Exchange Rate Regime; Fixed or Floating Exchange Rate
Understanding Exchange Rates
Source: Bangko Sentral ng Pilipinas (2020). Statistics-Exchange Rate. Accessed at
https:// www.bsp.gov.ph/SitePages/Statistics/ExchangeRate.aspx
Note: The Philippines employed a fixed exchange rate during the early years of 1970s.
Understanding Exchange Rates Importance of Forex • As a price mechanism: It
facilitates easy exchange of goods, services, and financial assets across countries. It
enables economies to compare prices quoted in different currencies.
• Who uses Foreign Exchange? — Consumers, Governments, International businesses.
• Purchasing goods and investing abroad
• Implement economic policies/programs (lending and borrowing money and providing
grants/aids). Ex: PH Government is expected to secure at lest $1.2 billion (PHP58.5B)
for its fight against COVID-19.
• Facilitate international trade (esp. for MNCs and TNCs). Ex: Nestle investing in cocoa
plantations in South African and Southeast Asian countries.
Understanding Exchange Rates Importance of Forex • As a component of economic
policy; Movements in exchange rates affect inflation and expectations about future price
movements, as well as foreign trade and output (GDP).
• ↑ Currency (Appreciation) → ↓inflation (vice versa), ceteris paribus. A stronger peso
would make the price of imported goods relatively cheaper, hence the apparent lower
prices. A weaker peso would make the price of imported goods relatively more
expensive, hence the apparent higher prices.
• ↑ Currency (Appreciation) → ↑ or ↓ in GDP/output, depending on an economy’s focus
(import-/export-orientation).
• GDP = C + I + G +NX
Understanding Exchange Rates Summary • What does it mean to have a
stronger/weaker relative to other currencies?
• “When a country’s currency appreciates (rises in value relative to other currencies) the
country’s goods abroad become more expensive and foreign goods in that country
becomes cheaper (holding domestic prices constant in the two counties). Conversely,
when a country’s currency depreciates, its goods abroad become cheaper and foreign
goods in that country becomes more expensive” (Mishkin 2008, p. 434). • Is a stronger
currency inherently better than a weaker currency? Example: USD1:109 JPY.
Understanding Exchange Rates Exchange Rate Movements •
Under the system of freely floating exchange rates, the value of the dollar in te
rms of the peso is determined in the interbank foreign exchange market (by th
e forces of supply and demand just like any commodity or service being sold i
n the market). Under a fixed exchange rate system, a par value rate is set bet
ween the peso and the dollar by the central bank. The par value may be adjus
ted from time to time. (BSP, 2020, p. 1)
• The Floating Exchange Rate Regime is primarily based on the Theory of Purchasing
Power Parity (determining exchange rate in the Long Run). Exchange rates between
any two currencies will adjust to reflect price levels of the two countries. (One
appreciates, the other depreciates).
Understanding Exchange Rates Exchange Rate Movements
• Factors that Affect Exchange Rates in the Long Run
• Relative Price Levels
• Trade Barriers (Tariffs and Quotas)
• Tastes and Preferences for Domestic vs Foreign Goods
• Interest Rates
• Productivity (↑ Prod, ↑ Domestic Output, ↓ Price, ↑ Demand for Domestic Goods, ↑
Exchange Rate)
• Principle: Anything that increases the demand for domestically produced goods that
are traded relative to foreign traded goods tend to appreciate the domestic currency.
(Why? They would need to convert their currency to buy PH products); and the other
way around
Understanding Exchange Rates Summary Table
FACTORS Change in Factor Response of the Exchange Rate Domestic Price Levels ↑
↓
Trade Barriers ↑ ↑
Import Demand ↑ ↓
Export Demand ↑ ↑
Productivity ↑ ↓
Understanding Exchange Rates Exchange Rate Movements • Case: Increasing
Demand for US Products in the PH Market for Dollars in the PHPhp per USD
D(1)($)
S(1)($)
D(2)($)
↗
Q($)
ER 1= 45
(1)
ER 2= 50
Q1 Q2
Dollar Appreciation
Market for Php in the US
USD per Php
D(1)(Php)
S(1)(Php) S(2)(Php)
Inflow of Peso in the US ↘
Q(Php)
Q1 Q2
ER 1= 0.15 ER 1= 0.20 Peso Depreciation
WRAP UP
• Foreign Exchange and Foreign Exchange Market
• Exchange Rate and ER Appreciation and Depreciation
• Importance (as a price mechanism and component of economic policy)
• ER Regimes (Fixed and Floating)
• Factors Affecting ER Movements
References
• Bangkok Sentral ng Pilipinas, 2020a. Statistics - Exchange Rates. Accessed on 11
April 2020 at https://www.bsp.gov.ph/SitePages/Statistics/ ExchangeRate.aspx
• Bangko Sentral ng Pilipinas, 2020b. The Exchange Rate. Accessed on 11 April 2020
at https://www.bsp.gov.ph/Media_and_Research/ Primers%20Faqs/exchange.pdf
• Mishkin, F. (2008). Understanding the Economics of Money, Banking , and Financial
Markets 8th Ed. Pearson Education:Singapore.
Learning Objectives:
1. Understand the difference between banking and banks.
2. Discuss the history of digital banking
3. Understand the importance of Digital marketing
4. Analyze the digital transformation
5. Analyze the difference between Digital Banking and Online Banking
Introduction:
Banking is defined as the business activity of accepting and safeguarding money owned
by other individuals and entities, and then lending out this money in order to conduct
economic activities such as making profit or simply covering operating expenses.
A bank is a financial institution licensed to receive deposits and make loans. Two of the
most common types of banks are commercial/retail and investment banks. Depending
on the type, a bank may also provide various financial services ranging from providing
safe deposit boxes and currency exchange to retirements and wealth management.
Banks are a safe place to deposit excess cash. The FDIC insures them. Banks also pay
savers a small percent of the deposited based on an interest rate.
Banks are currently not required to keep any percentage of each deposit on hand,
though the Federal Reserve or The Fed can change this. That regulation is called the
reserve requirement. They make money by charging higher interest rates on their loans
than they pay for deposits.
Digitalization is changing how people interact and do business on a day-to-day basis,
and advancements in banking technology are continuing to influence the future of
financial services around the world. An increasing demand for a digital banking
experience from millennials.
From retail and mobile banking, to neobank startups, technology has its hand in
seemingly every aspect of the banking industry; and, the influence of technology will
continue to launch banking into a digitized future.
Methodology:
The teaching and learning methods will be a blend of the following:
Virtual Discussion
Reflections
Readings on current topics
Forum/ Student discussions
Course work/ Online activities
Student presentations
SO LET’S LEARN
Presentation of Content:
Dіgіtаl Trаnѕfоrmаtіоn
At the beginning оf the digital ѕhіft, households wоuld gаіn ассеѕѕ tо their accounts. Aѕ
time wеnt on, services thаt were trаdіtіоnаllу hеld іn brісk аnd mоrtаr, physical
lосаtіоnѕ. Aѕ tесhnоlоgу рrоgrеѕѕеd, more dеvісеѕ gаіnеd ассеѕѕ tо bаnkіng ѕеrvісеѕ
online. In оrdеr tо keep uр wіth thе tіmеѕ, bаnkѕ needed tо lеаd thе way fоr financial
institutions bу adapting to dіgіtаl times.
Cаріtаl
The ріllаrѕ of Trаdіtіоnаl Banking (Deposits & Loans) rest upon the fоundаtіоn of
Cаріtаl. All bank must have ассеѕѕ to Cаріtаl, which іѕ lеvеrаgеd with deposits and
then рrudеntlу соnvеrtеd іntо lоаnѕ that gеnеrаtе job and есоnоmіс growth. Friends of
Trаdіtіоnаl Banking ѕuрроrt policies that fасіlіtаtе the flоw of capital іntо оur banking
system аnd which аllоw market drіvеn returns to be earned оn capital that іѕ рlасеd at
rіѕk. We орроѕе аnу policies that make it more dіffісult to аttrасt саріtаl into thіѕ сrіtісаl
process.
Deposits
Onсе Capital is invested, іt іѕ lеvеrаgеd through the collection of deposits that rерrеѕеnt
the ѕаvіngѕ or liquid rеѕеrvеѕ оf іndіvіduаlѕ and buѕіnеѕѕеѕ in the соmmunіtу. Thе
соllесtіоn оf thеѕе dероѕіtѕ is facilitated by thе fасt thаt thеу аrе іnѕurеd uр tо $250,000
bу thе full fаіth аnd сrеdіt of the U.S. Government thrоugh thе Fеdеrаl Dероѕіt
Inѕurаnсе Corporation (FDIC). This guarantee lоwеrѕ thе rеԛuіrеd rеturn and rеѕultѕ in
аn аррrорrіаtе lеvеl of regulation. Dероѕіtоrѕ hаvе rеаdу access tо their dероѕіtѕ
thrоugh a numbеr оf tools (і.е. сhесkѕ, dеbіt саrdѕ, internet, аnd other еlесtrоnіс
trаnѕfеrѕ, еtс.) Frіеndѕ оf Traditional Bаnkіng ѕuрроrtѕ роlісіеѕ that рrоmоtе thе аbіlіtу
tо аttrасt deposits аnd oppose роlісіеѕ thаt unduly іnсrеаѕе the соѕt (rеgulаtоrу or
financial) оf those dероѕіtѕ, or in аnу way dіѕruрtѕ аn іndіvіduаl'ѕ оr buѕіnеѕѕ' ассеѕѕ to
thеѕе dероѕіtѕ.
Loans
The combination of Capital and FDIC insured deposits constitutes the basis for the
amount of money that can be disbursed in loans. Prudent loans to individuals and
businesses drive healthy economic growth.
Legacy core banking systems are often decades old, mainframe based platforms
that support a bank’s back end operations across core functions such as account
opening, account set up, transaction processing, deposits processing, loan
processing and more. Due to legacy technology, proprietary data models, and
limited ability to interface with other systems, legacy systems can restrict a
bank’s ability to rapidly deliver new experiences, products and services.
Legacy cores tend to be older and hold important information regarding banking,
and those can become obsolete and inaccessible with the shift to digital banking.
These files can be transferred and uploaded, however, that takes a lot of manual
labor and sometimes institutions are not able to upkeep those files because
established banks often feel cornered by their legacy core systems, many see
investing in new core systems for digital services as a strategic priority. Digital by
design, new cores rely heavily on the cloud and associated services, introduce
dynamic pricing to cut costs and reduce complexity by eliminating paper
processes. In addition, banks use new platforms to implement digital channels,
enhance the customer experience, and launch new products and services faster
than before.
Some people are just used to the old school ways of operating and prefer in
person-banking. It can be complicated and some may not understand it well, so
shifting to a completely digital platform can use a barrier of accessibility to certain
audiences.
3. Winning and Retaining Customer’s Trust
With word of fraud, digital attacks, and cyber threats, winning and retaining
customer trust can be difficult. Even with smaller instances or one big one, this
can derail any momentum on gaining the trust of customers and they may turn to
another method of banking quickly.
With new regulations and rules in place as the shift to online banking continues, it
is sometimes difficult to maintain compliant to these rules as they are new,
difficult to understand, and may cost more capital to upkeep.
There are many different digital solutions which help cater to different customers’
needs. These solutions come from the difference in loan software. Loan software
puts into view the design and facilitation of the service of providing loans.
There are multiple types of banking products and services. To qualify as a Digital
Banking Platform/Solution they must contain the following things:
2001 Online banking expands to cover 20 million unique users, with at least
eight different US banks crossing the plateau of 1 million different users
2007 The launch of the first iPhone begins pivotal shift to digital banking with
users given access to their banking information on the go.
2009 Online banking reaches 54 million sole users in the US alone
2016 Millennials push the transition to digital banking preferences, giving a
signal to banks to work towards more online options.
2018 Temenos (Temenos AG is a company specialising in enterprise software
for banks and financial services, with its headquarters in Geneva,
Switzerland) acquires competitors and grows to be the leader of providing
digital customer options for most financial organizations.
2019 Temenos acquires mobile app leaders to create and empire of digital
banking services
Digital Banking
Ways Digital Banking Drives Revenue Growth
Increased use of smartphones and superior digital apps are driving the increase of
digital banking. Digital banking is traditional banking activities and programs that
customers were only able to do inside a bank are done online. Not only does digital
banking drive revenue growth, but in our digital world, banks must adopt a new model
that is more customer-centered. They must increase their online products and provide
customers with more service channels.
Digital Attacking
This allows banks to enter new markets, potentially in other countries, without having to
put a physical building in any of those new locations. Banks can create digital channels
and new businesses to attract more customers in a short amount of time. Since these
are digital channels, the banks do not have to create expensive storefronts. This way,
the banks can bring in income without having to put out additional income in
infrastructure.
Additional Activity:
I would like you to read on the following:
1. Monetize data
2. Broaden Financial Reach
3. Focus on the Customer Journey
4. Bill Pay
5. Cloud Computing
Steps to Staring a Digital Banking Transformation
1. Outline your Objectives
2. Study Competitors and your Product Offerings
3. Assess Processes
4. Evaluate Culture and Willingness to Adapt
5. Analyze Talent and Recruiting
6. Inventory Systems and Products
7. Define Customer and Member Segmentation
8. Consider your Communication and Marketing Plans
9. Conduct a Risk Assessment
10. Prioritize
Conclusion
As times evolve, digital banking has become an incredibly trendy and worthwhile
investment for banking institutions. Online banking has become a culture that has
customers in mind as well as their business and industry.
Being able to service more customers in efficient ways is how banking is evolving
towards a digital space. As technology grows, so will banking and Banking-As-A-
Service (BaaS) will help expand the industry.
HAPPY LEARNING!!!
E-COMMERECE
What is Commerce
According to Dictionary.com, commerce is a division of trade or production which
deals with the exchange of goods and services from producer to final consumer
It comprises the trading of something of economic value such as goods, services,
information, or money between two or more entities.
Commonly known as Electronic Marketing
It consists of buying and selling goods and services over an electronic system
such as the internet and other computer networks.
E-Commerce is the purchasing, selling and exchanging goods and services over
computer networks (internet) through which transaction or terms of sale are
performed electronically.
Why Use e-Commerce?
Low Entry cost
Reduce transaction costs
Access to the global market
Secure market share
Types of e-Commerce
1. Business-to Business (B2B)
It consists of largest form of Ecommerce. This model defines that buyer
and seller are two different entities. It is similar to manufacturer issuing
goods to the retailer or wholesaler.
The simple explanation of B2B E-Commerce is E-Commerce between
companies and comprises businesses directing e-purchase, negotiating
purchase transactions, network associations, and supply chain
management over the internet. Businesses make use of E-Commerce to
reduce costs of transactions while conducting business and to make
reserves in terms of time and effort when carrying out a business. Being
the main group of ecommerce, most experts project that B2B E-
Commerce will constantly rise faster than the B2C segment.
Example:
Dell deals computers and other associated accessories online but it does not
make up all those products. So, in govern to deal those products, first step is to
purchase them from online business (ex: the producers of those products)
2. Business-to-Consumer (B2C)
It is the model taking business and consumers interaction. The basic
concept of this model is to sell the product online to the consumers.
B2C is the direct trade between the company and consumers. It provides
direct selling through online.
Business-to-consumer E-Commerce is defined as business between
companies and consumers.
It includes customers collecting information; buying physical goods (i.e.,
tangibles such as consumer products or books) or information goods i.e.,
goods of electronic material or digital content, such as electronic books
and software; and, for information goods, getting products through an
electronic network. This is the largest and oldest form of E-Commerce.
For example: If you want to sell goods and services to consumer so that
anybody can purchase any products directly from supplier’s website.
3. Business-to-Employee (B2E)
Business-to-employee electronic commerce uses an intrabusiness
network which allows companies to provide products and/or services to
their employees. Typically, companies use B2E networks to automate
employee-related corporate processes.
4. Consumer-to-Consumer (C2C)
Consumer-to-consumer E-Commerce or C2C can be defined as
commerce between private individuals or consumers. Being considered by
the development of electronic market-places and online auctions, mainly
in situation of vertical businesses where firms/businesses can propose for
the things they require from numerous suppliers, it possibly has the
extreme potential for developing new markets.
There are many sites offering free classifieds, auctions, and forums where
individuals can buy and sell. Thanks to online payment systems like Paypal
where people can send and receive money online with ease. E-bay’s auction
service is a great example of where person-to-person transactions take place
every day since 1985.
5. Business-to-Government
Generally, Business-to-government E-Commerce or B2G is described as
business between companies and the public sector. In other words, it is
referred to as use of Internet for public procurement, many government-
related operations, and licensing procedures. This type of E-Commerce
has two characteristics: first, the public sector undertakes an important
role in founding E-Commerce; and second, it is expected that the public
sector has the highest requirement for making its obtaining system more
active. Policies of web-based purchasing raise the clearness of the
procurement process (and thus decrease the risk of indiscretions).
Small and medium enterprises in developing countries have now expanded their
market due to its ability to transact directly with the customers at an international
level and have the opportunity to advertise their goods and services globally. The
tourism sector has grabbed the opportunity really well and has achieved a higher
market position by adopting E-Commerce at an extensive level. It lends
assistance in compiling a list of all the services offered by them category wise at
their website. Moreover, small, and medium enterprises in developing countries
have an easy and quick accessibility to internet and find it most reliable and
inexpensive means for the acquisition of online technical support and software
tools and application. Lodging technical inquiries and placing an order for
replacement or new tools have now become easy for this sector due to the
introduction of E-Commerce in developing countries. E-Commerce has now
become an essential tool for entrepreneurs of developing countries to connect
their businesses on an international platform. Despites many constraints, E-
Commerce has managed to attract not just new and budding entrepreneurs but
have helped the established one give a tough competition to its competitors by
adopting various techniques in the same field.
CHALLENGES OF e-commerce
In a survey conducted by comScore and UPS, it was found that 63% of total
American consumers check for return policy before making any purchase and
around 48% of people shop more with those retailers that offer hassle-free
returns than those who provide terms and conditions. These facts clearly depict
that how consumers look for authenticated and hassle-free return and refund
policy.
Once a customer login and signs up on the portal of E-Commerce website, the
company is completely unaware about all the details of customers except the
information entered by the customer. This results in the doubt on trustworthiness
of customer, which leads to the rise of many questions regarding the faith of
customers. Hence, all these situations might lead to chances where some of the
customers opt for Cash-On-Delivery (COD) option, and after placing the order,
they refuse to accept the product. Hence, these actions result in huge losses of
revenues for many emerging and well-established E-Commerce companies.
When a product is returned due to dissatisfaction of customer then business of
E-Commerce has to suffer heavy loss with regard to shipment of products and
reputation of a company. For those companies who deliver the product free of
cost, the cost for the company in terms of logistics and shipping have always
been scary and burdensome for them.
Solution:
Both return and refund policies are a part of customer services and to underestimate
both of these policies will turn out to be a big mistake for retailers. The best thing any
firm can do is to build strong return and refund policies. In the same context, some of
the considerations are given below to be kept on mind while designing return policies:
1. Companies should never hide their policies and must be transparent.
2. All the companies should use plain and simple English that can be easily
understood by everyone. This is because not all the customers who will read
the policy terms and conditions will be highly intellectual to understand them.
3. Usage of some scary stuff in the policies like, “you must,” “you are required,”
must be avoided as too harsh policy measures may stop the customers to
purchase the product.
4. Companies should clearly outline what all they can expect from their
customers and they should provide them with the various options for easy
payments and shipping.
5. The staff must be well equipped regarding all the information about return
policy such that they can easily assist customers to make quick and effective
orders.
6. Companies should be well prepared to face the cost of their mistakes
because if any product is shipped wrong, then companies should take some
extra efforts to make their customers happier and loyal to them.
Solution:
What is a “Market”?
A market is a place where trading occurs. But does a market have to be a place? No. There are
many types of markets: supermarkets where you can purchase everything from food to flowers,
essential supplies, flea markets where people buy and sell used items, black markets in which
illegal or illegally acquired commodities trade hands, stock markets, meat markets, money
markets and farmers’ markets. In short, there are many different institutions that we identify as a
market. Nevertheless, when many of us think of a market, we tend to think of the organized
financial markets and more explicitly, the trading floors of the securities exchanges.
NASDAQ- North American Securities Dealers Automated Quotation System
An electronic network aimed at getting buyers and sellers together without the use of a specialist
system, broker network, or populated trading floor as is currently employed by the NYSE.
In the realm of equities (or stock), there is a distinction drawn between “listed” as in listed on the
NYSE and “OTC” as in over the counter such as NASDAQ stock.
Where does the terminology OTC come from? Was there ever a counter over which transactions
took place? As with most terminology, this expression likely has its origins grounded in fact.
At one time, individuals engaged in the trading of (paper) security certificates out-of-doors over
tabletops in lower Manhattan; no doubt, inclement weather is only one of the many reasons that
the members of the American Curbside Brokers Association moved in-doors, changed their
name, and established the American Stock Exchange (AMEX), a rival of the NYSE.
Though, there once may have actually been a counter, nowadays OTC simply refers to trading
which is either done over the telephone or done electronically (through an electronic
communication network (ECN) or some other telecommunications or computer-based system.
The foreign exchange market today is almost exclusively done OTC. There are, as is almost
always the case in foreign exchange, exceptions, such as the International Monetary Market
(IMM) currency features and the options written on those futures, which trade at the MERC (the
Chicago Mercantile Exchange), the LIFFE (the London International Monetary Exchange) and
also foreign exchange options which trade on, of all places, the Philadelphia Stock Exchange, but
these contracts constitute only a very, very small part of the volume in foreign exchange.
A market is simply an institution that has, as its goal, brining buyers and sellers together.
The foreign exchange markets are global, primarily over-the-counter, and relatively unregulated
(compared to the securities markets). As FX (forex) trading involves dealing in money and banks
continue to serve as the warehouses of this commodity, these markets tend to be dominated by
the large international money center banks.
What is a “Price”? What is a “price”? Adam Smith once said,
The real price of everything, what everything really costs to the man who wants to acquire it, is
the toil and trouble of acquiring it” – Adam Smith, An Inquiry into the Nature and Causes of the
Wealth of Nations (1776)
While we believe this to be true, this is not usually the way that we think about prices in our
daily life. Ask yourself, “what is the prices of a hamburger. For the sake of argument, let’s say
you respond with, “$4”. That is, you say, “the price of a hamburger is 4 Dollars”
Let’s try to think about prices differently. I believe that it is reasonable to think of the price of a
hamburger as $4, but what this really means is that you will receive 1 hamburger for USD 4.
These two numbers constitute an exchange or a trade. In this sense, this prices (and very price)
can (and should) be thought of as a ration of quantities.
USD 4
1 hamburger
A Price is a Ratio of Quantities
More precisely, what this indicates is that if you give up four USD, you will receive one
hamburger. Though it may sound odd when articulated in this way, when we are buying
hamburgers, we are selling Dollars, and the price identifies the rate of exchange. And though it
may sound even stranger, McDonald’s buys Dollars with hamburgers, though almost everyone
would identify McDonald’s typical daily activity as selling hamburgers.
Every time you buy one thing, you sell another thing (nothing explicitly that this refers to one
transaction, not two) and every time you sell something, you necessarily buy something else in
exchange.
Reference:
Reference: Tim Weithers (2006)
TRADING MONEY
Introduction
When many of us think of foreign exchange, what comes to mind are those little booths in the
airport malls at which we can exchange, say, the US dollars for British Pounds Sterling when our
way to or from a vacation or business trip. Indeed, in some ways, there is nothing more
complicated about the market to foreign exchange than that; it is all about buying and selling
money.
But there are two things to note up front about foreign exchange that make it appear a bit
daunting. First, the realm of foreign exchange is rife with incomprehensible slang, confusing
jargon a real challenge. Banks and other financial institutions can’t even agree as to what this
business area should be called: FX, Currencies, Treasury Products, ForEx or Forex, Bank Notes,
Exchange Rates. Second, and more fundamentally, what constitutes “foreign” depends upon
where you consider “home” (example: whether you are from the U.S or the U.K).
Introduction:
This module is intended for all who want to learn the introduction to the theory and application
of risk management. It sets out an integrated introduction to the management of risk in public
and private organizations. This might also help you to gain a better understanding of risk and
risk management and thereby fulfil the primary responsibilities of your jobs with an enhanced
understanding of risk.
A chance or possibility of danger, loss, injury or other adverse consequences, and the definition
of at risk is “exposed to danger”.
In this context, risk is used to signify negative consequences. However, taking a risk can also
result in a positive outcome. A third possibility is that risk is related to uncertainty of outcome.
For most people, owning a car is an opportunity to become more mobile and gain related
benefits. However, there are uncertainties in owning a car that are related to maintenance and
repair costs. Finally motor cars can be involved in accidents, so there are obvious negative
outcomes that can occur. It is also important to remember the legal obligations associated with
car ownership and the rules that must be obeyed when the car is being driven on the road.
The Institute of Risk Management (IRM) defines risk as the combination of the probability of an
event and its consequence. Consequences can range from positive to negative. This is widely
applicable and practical definition that can be easily applied.
Types of Risks
Risk may have positive or negative outcomes or may simply result in uncertainty. Therefore,
risks may be considered to be related to an opportunity or a loss or the presence of uncertainty
for an organization. Every risk has its own characteristics that require particular management or
analysis.
Example of this can be associated with the benefits that the project produces, as well as
uncertainty about the delivery of the project on time, within budget and to
specification.
The management of control risks will often be undertaken in order to ensure that the outcome
from the business activities fall within the desired range. The purpose is to reduce the variance
between anticipated outcomes and actual results.
Level of Risk
Following the events in the world financial system during 2008, all organizations are taking a
greater interest in risk and risk management. It is increasingly understood that the explicit and
structured management of risks bring benefits. By taking a proactive approach to risk and risk
management, organizations will be able to achieve the following four areas of improvement:
a. Strategy
Because the risks associated with different strategic options will be fully analyzed
and better strategic decisions will be reached.
b. Tactics
Consideration will have been given to selection of the tactics and the risks
involved in the alternatives that may be available.
c. Operations
Events that can cause disruption will be identified in advance and actions take to
reduce the likelihood of these events occurring, limit the damage caused by
these events and contain the costs of the events.
d. Compliance
This will be enhanced because the risks associated with failure to achieve
compliance with statutory and customer obligations will be recognized.
Hazard risks undermine objectives, and the level of impact such risks is a measure of their
significance. Risk management has its longest history and earliest origins in the management of
hazard risks. Hazard risk management is closely related to the management of insurable risks.
Remember that a hazard (or pure) risk can only have a negative outcome.
Hazard risk management is concerned with issues such as health and safety at work, fire
prevention, avoiding damage to property and the consequences of defective products. This can
cause disruption to normal operations as well as resulting in increased costs and poor publicity
associated with disruptive events.
Another feature of risk and risk management is that many risks are taken by organizations in
order to achieve reward. A business will launch a new product because it believes that greater
profit is available from the successful marketing of the product. In launching a new product, the
organization will put resources at risk because it has decided that a certain amount of risk
taking is appropriate. The value at risk represents the risk appetite of the organization with
respect to the activity that it is undertaking.
When an organization puts value at risk in this way, it should do so with full knowledge of the
risk exposure and it should be satisfied that the risk exposure is within the appetite of the
organization. Even more important, it should ensure that, it has sufficient resources to cover
the risk exposure. In other words, the risk exposure and the should be quantified, the appetite
to take the level of risk should be adverse consequences should be clearly established.
ATTITUDES OF RISK
Different organizations will have different attitudes to risk. Some organizations may be
considered to be risk averse, whilst others will be risk aggressive. To some extent, the attitude
of the organization to risk will depend on the sector and the nature and maturity of the
marketplace within which it operates, as well as the attitude of the individual board members.
Example:
When a building is constructed, the nature of the ground conditions may not always be known
in detail. As the construction work proceeds, more information will be available about the
nature of the conditions. This information may be positive news that the ground is stronger
than expected and less foundation work is required. Alternatively, it may be discovered that the
ground is contaminated or is weaker than expected or that there are other potentially adverse
circumstances, such as archaeological remains being discovered.