Abstract
You will be examining three organizations. Each organization is slightly different. Your task is to determine several strategies to mitigate the credit or operational risk in each organization. For each firm, describe the recommended strategy and discuss the position of the firm.
The credit or default risk is the possibility for a bond issuer to not be able to pay back the interest and principal in the time. The most secured bonds are issued by federal government, followed by municipalities and corporation.
The operational risk is " the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events".
Firm 1 is a large multinational organization with operations in several countries. The company's industry is currently experiencing an economic downturn. While the firm is currently in good shape, it wishes to avoid bad news as it is concerned about further economic downturns. The firm owns a variety of bonds in its investment portfolio. They are not currently worried about market risk. If the bonds were to decline in value due to credit events, the firm would experience losses it wishes to avoid. What approaches or strategies could you recommend to mitigate this risk?
Firm 2 is a large, regional bank. In the past, the bank mainly conducted business in its geographic region. Senior management recently decided to expand its business in other countries. There are two general strategies driving this decision. First, the bank plans to expand the investment portfolio and buy sovereign bonds. These bonds are expected to be from emerging market countries and denominated in the currency of the issuer. Second, the bank will also make loans to companies in other countries that may or may not be denominated in other currencies. The bank has traded foreign currency for its clients, but always on an agency basis. What would you recommend to mitigate the potential credit risk?
Firm 3 is a large commercial bank. The bank has been experiencing high error rates in its processing of trades in bonds and currencies. This high failure rate is causing it to lose some clients due to the high cost of fixing errors. How would you go about assessing the situation and recommending improvements to the settlement process?
