May 2016 Q4 a.
Booms and Bumps Limited has recently been registered as multi-national company dealing in the production and drilling of crude oil in the Oil and Gas industry. Due to uncertainties surrounding the future prospect of the industry, management has hired you as a financial consultant to conduct risk assessment about the viability of the firm. In the course of the assessment you constructed a risk register containing various risk that have the potential to affect negatively the profitability of the company.
Required:
Outline THREE basis strategies the management of the company can adopt to mitigate the impact of the risks. (3 marks)
View Solution
1. Hedging – this is a strategy to mitigate exposure to risk by undertaking equal and opposite transactions. An example is currency risk and interest rate risk. It involves implementation of action to ensure certainty of business outcome.
2. Diversification – This involves strategies to avoid risk by spreading funds over a portfolio of investments. A portfolio of different investments with varying degrees of risk helps to reduce the overall risk of the business. This helps to prevent the concept of “putting all eggs in one basket”.
3. Risk Mitigation – This involves implementation of control to avoid investments in projects whose risk is higher than the shareholders required rate of return.