Risk Management And Company Valuation Strategies

Discussion

Risk management is a key part of maintaining effective business management and allowing a company to remain profitable and desirable to investors for extended periods of time. The risk management process entails identifying and managing potentially dangerous hazards in order to reduce the impact of such risks on the organization’s operations. The five primary steps of risk management are: identifying the risk, analyzing the risk with tools and various models, prioritizing the risk based on the level of hazard and impact, treating the risk with all available resources at the company’s disposal, and monitoring the risk on a regular basis after successfully executing a risk management strategy. An organization must deal with a variety of financial concerns relating to many parts of the business, such as debt repayment, employee salary, and other issues. To effectively handle the financial challenges that a company faces, it must apply a variety of risk management measures. The goal of this study is to examine and explain an organization’s risk management method in relation to various facets of a business. The report answers four questions about how an organization’s risk management policies are implemented. The first section of the study discusses the many valuation approaches used by the financial sector to assess organizations, such as the income method, market approach, and asset approach. Other relative value indicators, such as the P/E ratio, P/S ratio, PBV ratio, and EV/EBITDA multiple, were examined and debated. The second question focuses on the many financial and other risks that an organization faces, such as market risk, credit risk, liquidity risk, operational risk, and others, as well as the impact of such risks on a company’s valuation. In the third section of the study, the procedures and approaches that an organization uses to manage and mitigate the risks stated above are explored. The influence of financial contracts such as forward contracts and swap contracts, as well as company-specific risk management techniques such as the use of valuation models and other financial models, are examined in length. The fourth and final section of the study explains the valuation process for several financial contracts that may be acquired from banks for risk management purposes. The study goes into great depth about the procedures taken by banks and regulators to guarantee that banks remain viable and able to pay their commitments.

Part 1 – Company Valuation

Company valuation is the process of determining the value of a company’s shares. Various company valuation approaches may be used to determine a firm’s fair worth, which is helpful in the decision-making process. A firm valuation procedure would enable an individual or an organization to examine the sales value, partner ownership, and value of completing deals. When an investor or a lender decides to invest in a company or lend capital to a company, investors and lenders must examine the company’s revenue and profitability forecasts, as well as the firm’s capacity to repay loans using cash flow generated by operations (Pinto, Robinson and Stowe 2019). The holder of one share in a corporation with one million shares outstanding owns one-millionth of the company; the value of that share should represent that percentage of the company’s worth. There are multiple company valuation methods that can be utilized like the income approach, market approach and asset approach. All of the methods are described in detail below:

Income Approach

The income approach of valuation comprises of two main valuation method; Capitalization of earning method and the discounted cash flow method. The two methods are discussed in detail below:

• Discounted cash flow technique – The Discounted Cash Flow technique is a method of valuing assets that is used to assess various organizations or projects. The model evaluates the firm’s worth by analyzing the company’s or project’s predicted future cash flows and applying a discount rate that represents the required return on capital from stakeholders. Individual and institutional investors, governments, regulatory agencies, research firms, and other decision makers utilize this technique to assess the investment potential of a stock or asset. The investment is profitable if the total value of the discounted cash flows for each year exceeds the amount invested. The formula for the discounted cash flow analysis is represented below: 

• Capitalization of earning method – This approach is similar to Discounted Cash Flow Analysis in that it uses an appropriate discount rate to discount a company’s future earnings. A successful project may enhance a company’s net worth and the profits obtained by investors, hence analyzing a project can be useful in establishing the company’s value. The main difference between the capitalization of earnings method and the DCF method is that in the DCF method, a terminal value based on the company’s future value is estimated, and it is based on assumptions of future terminal growth rate, which accounts for a significant portion of the calculation of a company’s intrinsic value (Pinto 2020). The profits technique simply capitalizes the firm’s future projected earnings by dividing them by the needed rate of return, assuming that the company will continue to operate in perpetuity.

For example, if a business’s future profits are $10 million and the needed rate of return is 10%, the total value of the company using the capitalization net earnings technique is 10/0.10 = $100 million, assuming the company would continue to exist in perpetuity.

The market approach is one of the most common techniques of valuing an asset or a company since it considers real-world comparable transaction data from many similar firms. The method considers the selling price of similar assets and firms and modifies the value to reflect the current status of the company being assessed. The method is most suitable in valuing companies where transaction data is available in abundance and would not be useful in situations where data is not available readily. Since data on asset classes like residential real estate and publicly traded shares is more readily available than data on asset classes like private enterprises and alternative investments, valuing these asset classes using this technique becomes more challenging. The main benefit of this strategy is that it is based on publicly available transaction data and that it requires less subjective assumptions. The main disadvantage of this technique is that, owing to a lack of transactional data, it cannot be utilized to value a wide range of asset classes (Olbrich, Quill and Rapp 2015).

It also considers valuation of companies using the relative price and enterprise multiples of comparable firms. Price multiples are the ratios of a stock’s current price to a fundamental value per share metric. Enterprise value multiples, on the other hand, connect the overall market worth of a firm’s financing options to a metric of fundamental value for the entire organization. There are a variety if price and enterprise multiple that can be used to value a company using the market approach, some of them are discussed below:

• P/E ratio – The P/E ratio is a price multiple used for corporate valuation that assesses the current stock price of the firm in relation to its earnings per share. To obtain the P/E ratio the price of the stock is divided by the earnings per share of the company. The drawback of this multiple is that earnings can be manipulated by accounting methods and techniques.
• P/S ratio – To calculate the Price to Sales ratio, divide the company’s market capitalization by its entire yearly revenue statistics. The ratio depicts the stock price in relation to the company’s sales, hence it cannot be used to value firms with no sales. Profitability inconsistency also has an impact on the ratio.
• P/BV ratio – The price to book value ratio compares a company’s market value per share with its book value per share to determine its worth. The multiple is calculated by multiplying the company’s stock price by its book value (assets-liabilities) per share. The disadvantage of this multiple is that it ignores the company’s future earnings as well as its intangible assets.
• EBITDA to sales – Before accounting for interest, taxes, amortization, and depreciation, the multiple indicates the cash gained by the firm for each dollar of revenue generated. An EBITDA margin of greater than 10% is typically regarded good.

The net asset value technique determines a business’s fair value by subtracting the book value of tangible assets by the book value of intangible assets and liabilities, to estimate the amount of money that would be collected if the company were liquidated today. The outcome is the firm’s fair value, which is then compared to its market value. If the market value of the firm is less than the value suggested by the Asset approach valuation technique, the company is said to be undervalued and an investment in the firm should be made. The asset approach may be used in combination with other valuation method to estimate a fair value of the stock. Net Asset Value (NAV) is used to evaluate the fair value of all assets, including depreciating and non-depreciating. A corporation with a lot of tangible assets is worth a lot of money. The formula for calculating the Net Asset Value (NAV) is as follows = Fair value of all the assets of the company – Sum of the outstanding liabilities of the company.

Part 2 –  Financial Risks

Market Approach

The first stage in the risk management process is to identify the many risks that the firm faces in various elements of its operations. Once the risks have been recognized, the firm may take steps and procedures to mitigate the risks and reduce the company’s risk exposure. This section identifies and discusses various risks; internal and external as faced by a company and the impact of the risks to the valuation of the company.

• Market risk – The chances that the value of an investment would drop as a result of market-wide conditions is referred to as market risk. Since, it impacts the whole market, this type of risk, also known as systemic risk or undiversifiable risk, cannot be managed via diversification. To protect itself from market-specific issues, the corporation enters into financial contracts in the form of hedging. Market risk is divided into four categories: equity risk, interest rate risk, currency risk, and commodities risk. Equity risk is the risk of fall in the prices of equity investments of the company causing investment losses which are booked as income/losses from other sources. Interest rate risk is the risk of volatility in the interest rate affecting the debt levels of the company. Currency risk arises from the fluctuation in the exchange rates between countries that the company conducts its operations into. The risk of price fluctuations in the commodities would directly impact the cost of raw materials and impact the company. Beta is a metric that may be used to assess market risk and the measuring unit of market volatility is called beta value. The beta is calculated based on the volatility of the stock price in the investment portfolio according to the index value of an appropriate comparable benchmark.
• Credit risk – Credit risk is a risk faced by an organization which arises due to the possibility of a borrower not being able to repay the loan given or honor any sort of monetary obligation that it has entered with the company. It is the risk that may incur a loss to the company in the form of loss of principal, loss of interest payment, cash flow disruption experienced by the company, and increase in the cost of collections. If a company is involved in lending capital to borrowers like mortgages, credit risk, and other types of loans, it runs the risk of the borrower not being able to repay the loan. If a company is involved in offering credit to customers, it runs the risks that the customer would not be able to pay of the invoices generated by the company at the due time and date.
• Liquidity risk – The danger of a security or an asset not being able to be sold at the right moment and in a timely manner to satisfy some obligation without affecting the security’s or asset’s price. Liquidity risk is a significant consideration for businesses that have assets held for trade and need immediate cash to satisfy certain commitments. A corporation may face two forms of liquidity risk in its operations, the first of which is funding liquidity risk, which is concerned with the firm’s ability to satisfy short-term financial commitments as and when they become due. A corporation is considered to have a high financing liquidity risk if it does not have enough liquid cash or cash equivalent securities to cover short-term demands. Another sort of liquidity risk is trading liquidity risk, which is concerned with the company’s ability to sell off its assets within a certain time period without negatively effecting the asset’s value.
• Operational risk – Operational risks can be defined as the risks which a company face while operating in a specific field or industry. It does not account for the risk which are spread across the market impacting every industry, sector or a company and it takes into account all the non-financial issues cropping up for the company. It is the risk that accounts the internal breakdowns in processes within an organization like people, systems, technology, human error or natural disasters which are all non-financial in nature. It may also be called as human risk, which is due to the fact that company’s operations may be impacted due to human error. Before making any financial decisions, it must be taken into account. Operational hazards, if not addressed, can result in significant financial losses for a company. Industries with a high level of human contact are more likely to have operational risks, which must be addressed prior investing more resources in the businesses.
• Legal risk – It can be defined as the loss or a potential loss that a company expects to experience due to litigation matters or legal issues. The legal issue may be related to a complain or claim made against them or failure to comply to rules and regulations laid down by the regulatory authorities of the country where the company is domiciled in. Under the Basel 2 accord passed in 2003, legal risk can be defined as the loss in reputation, financial loss or fall in market value associated with any type of legal issue that the company is facing. The legal risk can arise as a result of the misunderstanding from the part of the company in identifying and complying to a business rule or regulation. The risk can be mitigated if the company remains active and take proactive steps in the direction of mitigating the risks.
• Business risk – With the exception of investment choices, business risk often encompasses all hazards associated with a firm’s strategy formulation. A choice to launch a new product or service to the market, or a possible cooperation with another firm, are examples of these kind of risks. Internal efficiency and production quotas are widely used in risk assessments to evaluate whether such a crucial international corporation is worth risking. The cause of risk can also be associated to the external factors and it becomes difficult for a company to protect itself from such a risk. A company may be able to mitigate the business risk of the company by employing efficient risk management strategies within the company.
• Strategic risks – The risk associated with a certain enterprise or investment is known as strategic risk. These business initiatives or investments are projected to be extremely profitable if they are executed with proper care, caution and prudence. When such endeavours or investments fail, it has a significant impact on corporate organisations and the financial performance of the company. The business’s financial performance may be impacted by a change in strategy in comparison to peers and rivals since it may expose the company to a different type of activity that is not undertaken by its competitors and over which it has no strategic advantage. Strategic risks are separated into two categories: business risks and non-business hazards. Business risks are the dangers that a corporation faces as a result of decisions it makes about products and services, including judgments about how to create and sell such items. Non-business risks are those that are not tied to goods or services and are instead related to other difficulties such as long-term finance sources.
• Reputational risk – An organisation is constantly susceptible to reputational risk, which is the danger that the company’s name and brand may be harmed as a result of both external and internal issues. The firm’s reputation can be harmed by direct or indirect activities by the corporation, individual employees, joint partners, and other third parties. To minimize the impact of reputational risk the companies needs to have good governance practices in the company along with being socially responsible and environmentally conscious. Reputational risk can hamper the performance of even the biggest of the companies and is a phenomenon which cannot be easily assessed. The damage of reputational risk can wipe out millions and billions of capitals from the market cap of the company and it can sometimes lead to a change in management at the highest levels.

Part 3 – Mitigation Of Risks

The organization estimates the level of significance of the possible risk once the risks have been identified. A low, moderate, or elevated manipulator might pose a threat. The stage of the evaluation determines whether a proposed project is accepted or rejected. Following the evaluation, the organization attempts to reduce the risk and the procedures in the mitigation process are designed to reduce the negative impact of the risks involved. The management that executes the risk management process has a significant impact on the process’s outcomes. As a result, mistakes in the computation may occur due to a lack of knowledge and comprehension. It’s the process of identifying the most important risks and devising strategies to mitigate them through risk controls. The process of mitigation entails a variety of approaches and procedures that are used by a company’s internal operations. Financial contracts such as forward contracts and Swap contracts, which are derivatives instruments established for the aim of hedging and risk mitigation, can also be used to try to minimize the risks. The section below, explains the internal processes of a company in managing and mitigating the effects of the risks identified in part two which include valuation models including futures and forwards choices and option valuation models like Black-Scholes Model (Gupta 2017).

Valuation model

The company may make use of futures and forward contracts which are essential hedging tools used by traders and institutions to hedge against unfavorable price movements which is detrimental to the firm’s financial performance. The two methods through which a firm might hedge its risks are future and forward contracts. Companies that do worldwide commerce face the constant danger of losing money in foreign transactions as a result of market risk. Investing in futures and forwards contracts might help to mitigate the risk. The main distinction between futures and forward contracts is that in a future contract, profits or losses from a change in asset price are realized every day rather than just on settlement day. As a result, a futures contract takes into account the asset’s daily price movements. There are various methods and techniques that is used by corporates to value the futures and forward contract to assess the benefits of using either of the instruments. It is an established fact that the value of a future and forward are zero at initiation and the forward price of an asset without the cost and benefits for holding an asset can be defined as the following formula . S₀ represents the spot price of the commodity, T refers to the time horizon of the contract and RF represents the risk-free rate of the country measured as the yield on government bonds (Ekadjaja and Henny 2019). If holding an asset would reap benefits and incur costs like storage costs, the equation for a fair price of futures changes to the following:

Asset Approach

Where PVt is the present value of the asset’s cost of ownership and PVt is the present value of the asset’s benefits of ownership. When interest rates and future prices of the relevant commodity are positively associated, futures are more desired and valuable than forward contracts, but the inverse is true when interest rates and future prices are negatively correlated.

After an appropriate evaluation of the fair prices of futures and forwards using formulas expressed above, a company can get involved into derivative contracts to exploit any price differences or arbitrage opportunity and mitigate the risks that is inherent in the business. The company can target to reduce the price risk, market risk, foreign exchange risk and the liquidity risk by employing the valuation models.

Option valuation models like Black-Scholes Merton model can be used by a company to determine the fair value of an option along with gauging the level of implied volatility persisting in the market which gives an idea about the risk level in the market. The Black-Scholes Model is an option valuation model which is employed by an organization to value the fair price of an option contract which can be used by a firm to hedge against specific market risks. If the price of the option is optimally ascertained the company would be able to carry out its risk management practices efficiently. The assumptions of the black scholes model are discussed below:

• Throughout the life of the option, the model suggests that the stock does not pay dividends. The industry’s movement is unpredictable and cannot be forecast and it is assumed that the market follows the Brownian motion in its geometric form. It is also assumed by the model that there are no transaction expenses when purchasing the option.
• The risk-free rate of return and the volatility of the underlying value are known and consistent, which is one of the model’s fundamental assumptions. The asset’s earnings are dispersed log normally. The model’s fundamental assumption is that the choice is European and can only be executed at the contract’s end.

The following formula is employed for calculating the fair price of an option:

S * N(d1 ) – Ke(–rt) * N(d2 ) C = S * N(d1 ) – Ke(–rt) * N(d2 )

Where,

d1 = [ln (S/K) + (r + 2/2) * t]

d2 = d1 -(sigma* t^0.5) – d1

The Black-Scholes Merton model also allows for the calculation of the option’s implied volatility using market data and the reverse engineering of the implied volatility that justifies the option’s pricing. The implied volatility may be used to determine how investors and traders in the market feel about market movements and the state of the country’s economy.

The use of financial contracts is one of the best tools as deployed by a company to mitigate the risks of a company which were discussed in part two of the assignment. The financial contracts are also called derivatives contracts. Derivatives are examples of financial contracts wherein one party agrees to accept the risk associated with the underlying asset which can be owned by the other party or can be independent. The value of derivatives is entirely determined by the fundamental assets’ value and they are very complex in nature often requiring professional trading and strategy desks in a company to efficiently execute a derivative strategy. Derivatives are often exchanged on counter-traded markets and it is an established fact that one of the parties to these derivatives is frequently exposed to a significant level of risk due to the nature of the contracts.

The benefits and drawbacks of hedging against market movements using both the instruments are shared below:

Forwards

A forward contract can be defined as a financial agreement which is entered into by two parties willing to acquire or sell a good at a price decided today executed at some time in the future. A forward contract is used for hedge and speculation reasons. A forward rate is similar to a futures market, with the exception that a futures price is standardized and exchange traded, but a forward contract is non-standardized and hence only suitable for hedging. The benefits and drawbacks of hedging using forwards are discussed in detail below:

• Forward contract helps the parties involved to fix the price of the commodity or asset beforehand and the risks of losing money due to price movement against one’s belief is not present. Currency risks can also be managed using the forward contracts which also includes management of interest rates risk.
• The flexible structure of the contracts allows the hedger to tailor the contract to his preferences and match the contract’s term to the investor’s time horizon. Once a forward contract is in place, the organisation can accurately predict cash inflows and outflows over a set period of time. This enables a corporation to be resource-ready in both adverse and favourable scenarios.

Swap

Swap contracts can be defined as financial derivatives contract which is used by two parties for the purpose of hedging or speculation. A swap contract allows two parties to exchange cash flows or liabilities arising from two different liabilities. Although, the underlying instrument can be any sort of security, but mostly swap involves cash flows based on notional principal of bonds or loans. There are two types of swap contracts; interest rate swaps and currency swaps providing flexibility for a firm to hedge variety of risks. If a corporation requires funds, it will hunt for the most cost-effective sources of credit. With a swap contract, a corporation can engage into a contract with a third party and enter into a pay fixed receive floating or vice versa kind of swap, depending on the situation (?erný and Witzany 2015). If a corporation wishes to borrow in a certain currency but does not have negotiating leverage with the currency’s lenders, it can engage into a currency swap contract with another party based on the specific currency and amount being exchanged. Swaps contract have multiple advantages for a company or a trader as it allows the lender to reduce the cost of borrowing for them. The competitive advantage associated with a borrower can be swapped for the competitive advantage of other borrower for the mutual benefits. As a result, both parties would be able to get their hands on the desired amount of capital in the desired currency but at a cheaper cost. Lenders and borrowers of different countries across the world can use the swaps contracts to get exposures in markets where they do not have presence already.

Principles of option valuation

An option is a contract that allows an investor to buy or sell a financial asset at a predetermined price for a specified period of time. An option offers the investor a right, but it also places a responsibility on the option writer. Options are offered on securities, stocks, futures, and currencies, and may be utilised for both speculation and risk reduction. An option can be utilised to profit from the growth in the underlying asset’s price as well as the collapse in the underlying asset’s market price.

Option pricing is founded on the fundamental notion that the law of one price must prevail and that any kind of arbitrage must be avoided. Arbitrage may be defined as profiting without investing one’s own money, assuming no risk for the gains made, and having no chance of a non-zero return on the assets. The price of an option should be set so that there is no room for arbitrage, and even if there was, arbitrage would be ruled out since the expenses of carrying out the arbitrage would outweigh the benefits received from the arbitrage. While pricing an option using any method available in the financial world, there are a few guiding principles which are common to all the methods deployed. The assumptions are discussed below in detail:

• In order to follow a replicating portfolio approach to arrive at the fair value of an option, the assets that are required for replication are all investible and marketable.
• The markets that the options are traded into should be frictionless without any hindrances faced by an option trader which are related to taxes or transaction costs.
• One of the primary assumptions of all the model that values options are that funds can be borrowed and lent risk-free without any restrictions.
• The investors and traders are allowed to involve into short selling.

The extrinsic value of an option can be made up two components namely time value and volatility premium. This can be interpreted as that the extrinsic value of the options depends on the time left to maturity and the volatility experienced by the underlying asset. The extrinsic value of an option can also be said to be dependent on risk free rate of interest and the dividend yield on the stock. Although the relationship between extrinsic value of an option, risk-free rate of return and dividend yield is not considered to be strong. Hence, it can be summarized that the option value is dependent on the following six variables:

• Asset price
• Strike price of the option
• Time to expiry
• Volatility of the underlying asset
• Risk free rate of interest
• Dividend yield on the stock

A call option’s price is favorably connected with the underlying stock’s price, whereas a put option’s price is adversely correlated with the stock’s price. If there is longer time until the option matures, it is believed that the stock price will experience more dramatic changes, hence the option price will be higher, regardless of the kind of option. Similarly, if the time left until the option contract matures is shorter, the option’s value will be lower since the broader market does not foresee a major change in the stock price. Hence, long-term option is more valuable than the short-term option. The option value is positively correlated with the volatility of the stock as higher volatility would result in high value of the option.

The price of the option is also affected by the option Greeks which are measures of financial sensitivity in the price of the options which are affected by the variables discussed above. With the use of option Greeks, an investor is better equipped to analyse the price of the option and assess the profitability (Kumar 2018). The five types of option Greeks are discussed below:

• Delta – A delta measures the rate of change in the price of the option with a $1 change in the price of the underlying security. A delta of 0.40 implies that the value of the option would change by $0.40 after every $1 change in the price of the underlying (Chang 2020).
• Gamma – Gamma measures the change in the option delta per one-point change in the price of the underlying. The metric gamma can be used to determine how convex a derivative’s value is in relation to the underlying.
• Theta – The sensitivity of the option price with respect to the change in the time left to maturity for the option is measured by theta.
• Rho – The Rho measures the change in the option price instigated by a change in the interest rate prevailing in the economy.
• Vega – The rate of change in the price of the option with respect to the change witnessed in the volatility of the underlying stock is measured by the Vega of the stock.

Hedging using Greeks

To avoid insolvency a bank is involved in various risk management strategies one of them involves using option Greeks to hedge portfolio returns. Banks often use options to hedge against the risk of market movements on the performance of the portfolio. Delta neutral strategy is one of the strategies that is used by banks to hedge portfolio by expecting that the future prospects of the market are neutral. The banks apply delta hedging strategies to protect its invested capital by creating a position with zero delta. As the delta of the underlying asset is equal to one, the bank can hedge itself by taking a position in negative delta for each long option that is being hedged (Lin, Liu and Chen 2016). Following the creation of a delta neutral option position, the next attention should be on the gamma, and a zero gamma assures that the option position is resistant to changes in market conditions. Both delta and gamma hedging are based on the assumption that the volatility of the underlying asset is constant. Although this assumption is false because market volatility is always changing, if an investor intends to hedge their portfolio against changes in volatility, they should use a Vega neutral approach.

Stress testing

Stress testing is a technique that uses a computer to simulate various scenarios depending on various factors in order to assess the robustness of a bank’s or other institution’s investment portfolios in the face of probable market volatility. This simulation approach allows a bank to estimate the probable loss it might face in the event of a downturn in the economy. To assess the overall loss in the bank’s portfolio, the bank combines the results of stress testing with additional risk management approaches such as sensitivity analysis (Dent, Westwood and Segoviano Basurto 2016). The simulation exercise can be repeated multiple times to estimate a range of negative outcomes expected by a potential change in economic variable like interest rate.

Back testing

Back testing is a method which evaluated the viability of a trading strategy which would allow the bank to check how well the strategy has performed ex-post. If the bank is utilizing a specific strategy of investing into a particular portfolio, it may use back testing to check how well that particular strategy would have performed based on the historical data of the constituents of the portfolio. The assumption behind the back-testing exercise is that if a strategy has performed well based on the historical data, it is expected to perform well in the future as well. If the banks pre-determine the level of risks and return before committing to a strategy, it may better be able to handle the outcome of the strategy

Conclusion

Every company must cope with varying degrees of risk, such as low, moderate, and high-level hazards. However, not all of the risks involved with an investment are foreseen. Unexpected occurrences might cost a corporation a lot of money, leading to the irreversible termination of an investment opportunity. Any project step, such as development, production, development, or cost estimation, may provide a risk. Negative occurrences are associated with investment risks, whilst good occurrences are associated with investment possibilities. The purpose of the report was to identify efficient risk management procedures in an organization. The first part of the report was concerned regarding financial sector valuation methodologies, such as the income method, market approach, and asset approach, as well as other relative value indicators, such as the P/E ratio, P/S ratio, PBV ratio, and EV/EBITDA multiple. The second part of the report was concerned with identifying the different types of risks inherent in an organization and its impacts on the value of the company in the market. Risk sources like market risk, liquidity risk, business risk, operational risk and several others were analysed and discussed thoroughly. The third section of the report was concerned with the techniques and tactics that an organisation employs to control and reduce the above-mentioned risks are investigated. Financial contracts like forward contracts and swap contracts, as well as company-specific risk management approaches like the usage of valuation models and other financial models, are thoroughly studied. The study’s fourth and final portion describes how to value a variety of financial contracts that may be obtained from banks for risk management reasons. The research delves at the mechanisms used by banks and regulators to ensure that banks remain viable and able to meet their obligations.

References

?erný, J. and Witzany, J., 2015. Interest rate swap credit valuation adjustment. The Journal of Derivatives, 23(2), pp.24-35.

Chang, K.P., 2020. On Option Greeks and Corporate Finance. Journal of Advanced Studies in Finance (JASF), 11(22), pp.183-193.

Dent, K., Westwood, B. and Segoviano Basurto, M., 2016. Stress testing of banks: an introduction. Bank of England Quarterly Bulletin, p.Q3.

Ekadjaja, M. and Henny, A.E., 2019. The Characteristics Of Users Derivative Company Towards The Company’ s Value. Jurnal Akuntansi, 23(1), pp.63-78.

Gupta, S.L., 2017. Financial Derivatives: Theory, concepts and problems. PHI Learning Pvt. Ltd..

Kumar, A., 2018. A Study on Risk Hedging Strategy: Efficacy Of Option Greeks. Abhinav National Monthly Refereed Journal of Research in Commerce & Management, 7(4), pp.77-85.

Lin, C.C., Liu, Y.T. and Chen, A.P., 2016. Hedging an option portfolio with minimum transaction lots: A fuzzy goal programming problem. Applied Soft Computing, 47, pp.295-303.

Olbrich, M., Quill, T. and Rapp, D.J., 2015. Business valuation inspired by the Austrian school. Journal of Business Valuation and Economic Loss Analysis, 10(1), pp.1-43.

Pinto, J.E., 2020. Equity asset valuation. John Wiley & Sons.

Pinto, J.E., Robinson, T.R. and Stowe, J.D., 2019. Equity valuation: A survey of professional practice. Review of financial economics, 37(2), pp.219-233.

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