2. Risks of Royal Dutch Shell Plc.
๏ capital market risk
๏ market risk:
๏ interest rate risk
๏ foreign exchange rate risk
๏ price risk
๏ credit risk
๏ liquidity risk
๏ country risk
๏ environment risk
๏ health, safety and security risk
๏ political risk
๏ property and liability risk
!
Financial risks Other risks
3. ๏ the risk that the capital
of the company can lose value,
generally caused by fluctuation
in security prices
๏ the volatility in the capital
markets affects the investment
performance, which in turn affect
the funding of future liabilities
๏ it could be also associated with
the capital market systematic
risk, that cannot be diversified
Capital market risk
4. Market risk
๏ the risk of possible losses
arising from movements in
market prices, these are
mainly due to fluctuation in:
๏ interest rate
๏ foreign exchange
๏ prices
5. Credit risk
๏ the risk of a loss that arises
when the counter party do
not repay on a certain date
6. Liquidity risk
๏ the probability of loss
generated by the inability
of the company to meet
its debt obligations
7. Country risk
๏ this risk includes all the risks
generated by the investment
in a foreign country.
It could be associated
with the different factors:
๏ economic
๏ politic
๏ social
8. Political risk
๏ the risk of possible negative
effects that political changes
or instability in a country
could have on the company
9. Property and liability risk
๏ the risk that the property
is damaged or destroyed
by a peril, while the liability
risk is the threat
of the company having to bear
the consequences of damage
or breaching standards
๏ these kinds of risk include also
the risk arising as a result of
unforeseen events
or liabilities
10. Environmental risk
๏ threat of adverse effects
arising from the outside
environment
of an organization's activities
(by effluents, emissions,
wastes, resource depletion)
11. Health, safety and security risk
๏ these risks include the risks
related to put in danger the
health, safety and security of
the workers (exposure to
dangerous substances,
risk of injury)
12. Risk management tools
๏ treasury standards
๏ insurance and derivatives instruments (futures, options,
commodity swaps)
๏ regular review of individual credit limits
๏ forward foreign exchange contracts
๏ raise of external debt and repayment programs
๏ certification (ISO 14001), awareness campaign to promote fuel
saving driving habits (HSSE risk)
13. Steps to reduce risk exposure
๏ detailed credit analysis and
continuos monitoring of
trading partners
๏ limiting large volume trade
with highest-rated
counterparties
๏ shortening exposure duration
๏ taking collateral
14. Why subsidiaries are not allowed
to deal in derivatives instruments?
Shell has a special Treasury structured by group level specialist
regional organizations and specialist of oil and gas trading who
deal with derivatives instruments.
this could be mainly due to a centralization policy.
“For example, different parts of the business involved
in treasury will frequently have different systems and different
ways of recording and reporting information. This can mean
that it can take a long time to construct a global cash or risk
position when combining information from different sources.”
Source: Woods, Group Vice President, SunGard,2009, p. 24
15. Jeannot Jonas
Director
Global Treasury Operations
Goodrich Corporations
“We chose to implement the AvantGard Treasury solution
because we wanted to improve visibility into daily cash
positions. We also needed to gain a higher degree of
structure surrounding our cash, risk and debt management
processes. The solution has thus far met all of our demands
in these areas, providing our treasury with the tools
necessary in order to make the best possible business
decisions and ultimately increase revenue.”
Source: Woods, Group Vice President, SunGard,2009, p. 24
16. Why should the board be responsible
and accountable for managing the risk?
the company must be able to identify, measure, control
and price all the risks that it faces. This mainly because it is
crucial not only for the profitability of the company,
but also to its solvency and future survival.
the main purposes of risk management are:
๏ identify possible risks
๏ reduce their impact
๏ provide a basis for the decision making
Source: Resti & Sironi, 2007, XXII
17. Building a hedging strategy
The main aim of a hedging strategy is to identify
and reduce the risk of losses on the capital
18. Risk management process
Risk Tolerances:
๏ Minor: noticeable disruption to results,
manageable;
๏ Moderate: material deterioration in results,
management response;
๏ Major: significant deterioration in results,
management response required;
๏ Severe: fundamental threat to operating
results, immediate senior management
attention;
๏ Worst Case: results threaten survival
of company in current form, potentially
full-time senior management response
until resolved
Establish the business context
and collecting information
๏ strategy
๏ business objectives
๏ risk tolerances
๏ risk owners stakeholders
๏ risk language
Identify risks
What and how can happen?
Source: Aabo, Fraser, Simkins, 2005, pp 18-31
19. Risk management process (2)
Assess risks and controls
determine consequence
Assess current controls
confirm
existence
determine
effectiveness
estimate strength of control
determine likelihood
estimate level of risk
Source: Aabo, Fraser, Simkins, 2005, pp 18-31