Risk Management

Firms are inherently exposed to various forms of financial risk. For example, companies operating internationally often conduct transactions in foreign currencies, leaving them vulnerable to unfavorable exchange rate fluctuations. Such shifts can erode revenues or inflate costs, ultimately compressing profit margins. Similarly, financial leverage introduces exposure to interest rate volatility, where abrupt increases can significantly inflate the cost of liabilities. More broadly, many firms rely on commodities for their production processes, and the often-significant price swings in these markets can severely impact profitability. In extreme cases, these fluctuations may entirely eliminate profits or even push a firm toward financial distress. For instance, energy costs, closely tied to oil and gas prices, have exhibited considerable volatility in recent years, leading to substantial losses for companies across various industries worldwide.