Financial Risk Management : In An Integrated Framework

Abstract: From our thesis, we have concluded that any corporation can generate value creation by mitigating and reducing the impacts of losses associated with financial risks. This can be done by implementing three steps of measuring, controlling and managing corporate-wide risks with applications of better capital adequacy regulations of Basel Accord & conventional practices of VaR, insurance, hedging and derivative in an integrated framework. From theoretical books, journals, we explored the value of using Basel Accords & Value at Risk (VaR) tool for Financial Risk Management and analyzed its pros and cons. The Basel Accord provides the guidelines and regulations for all the banks of world for better capital adequacy. It is apparent that Value at Risk has developed as a successful financial risk assessment methodology of corporations in the last decade. There are three methodologies in which Value at Risk can be measured. Danske Bank and Maersk - A.P Moller Group also use VaR for financial risk management. Insurance is valuable to corporations in the context of mitigating the impacts of operational risk. Hedging against various kinds of risks is a common practice in financial institutions. Normally hedging is exercised in banks with derivatives. Corporate risk management through hedging against risks with derivatives minimizes the risks and thereby increasing the efficiency and worthiness of banks. Through our case study to Maersk - A.P Moller Group, we can observe that Hedging and Derivatives are commonly used to mitigate their interest rate and rate of exchange risks.