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Hi, need to submit a 500 words essay on the topic Summary of article.ERM creates value to shareholders at the macro and micro levels by enabling senior management manage the risk return tradeoff facin
Hi, need to submit a 500 words essay on the topic Summary of article.
ERM creates value to shareholders at the macro and micro levels by enabling senior management manage the risk return tradeoff facing the firm. Likewise, it helps firms access the capital market that helps in implementing a firm’s strategy.
In order to determine the right amount of risk to bear, an organization needs to recognize that the costs associated with cash flows cannot exist if the organization has a huge buffer stock of equity invested in liquid assets. Reduction of risks helps minimize expensive equity capital that is required in supporting organizations operating risks. In addition, companies should not be in a position to think that the earnings will never go beyond the level the firm is aiming to protect. This is because, if a firm is operating in a business that is promising more than the risk-free rate, then the chances of falling into a financial distress are high. Therefore, the management can use ERM to eliminate the chances of distress to a level that is likely to increase a firm’s value. In addition, companies can use the transition matrix to ensure that the firm’s financial health is reliable. The transition matrix helps to estimate the amount of capital necessary to support risk.
For ERM to be effective in an organization, the management should ensure that all employees understand the importance of ERM and its value. The managers should understand that it is a critical tool for strategy implementation (Nocco & René 14). Moreover, a firm that uses the market, credit, and operational risk tend to have different distributions. Market risk is more like the returns on portfolio of securities that use symmetric distribution. On the other hand, credit and operational risks have asymmetric distribution. With credit risk, the creditor pays in full the amount of money owned to an organization or does not. In addition, when a creditor defaults, it can lead to great losses to the organization. On the contrary, with
