Risk Management Summary and Use of Derivatives

The different steps involved in managing financial risk should now be quite clear. They are as follows: ■ Identify the treasury-related financial risks operating within the business. This exercise may be part of a much wider company or group-wide risk management exercise, or it may be a one-off exercise undertaken by the treasury department. In many cases, for instance in most large to medium-sized companies, the financial risks to which the company is exposed will be well known to the treasury department. In other situations, for instance in many multinational companies with complex intercompany and external flows, or where a company has not explicitly measured all its financial risks before, a separate exercise may be necessary to map and identify the quantum of financial risk.■ Measure the magnitude of these treasury-related financial risks. Before any action can be taken to manage financi al risks, the size and timing of these risks must be identified. In addition, only those risks that are significant in the overall scope of the business need to be managed. Generally the treasury department’s risk management will be set within the overall scope of the company-wide risk management programme.■ Establish the company’s treasury risk policies.