Essay: M&S Risk management practices

Essay: M&S Risk management practices
12/04/2011 Comments Off on Essay: M&S Risk management practices Academic Papers on Business Studies,Sample Academic Papers admin

Sample Essay

Contrary to Beale, M&S has adopted an aggressive strategy regarding the use of debts and borrowing. It’s high gearing ratio and international trading has made it more exposed to different types of risk as compared to Beale.  This has increased the financial risks of the group. Management at M&S has taken apt measure to counterbalance these risk by using derivatives and other financial arrangements.

Besides derivatives company is meeting its expenses from the borrowing, using the liquid resources and other trade debtors. All these funds are used to finance the day to day operations of the business. The gearing ratio of the retail stores was 59% and 64% in the year of 2007 and 2008 respectively. To hedge this high level of gearing as compared to industry, the company has been using different types of derivates. M&S is mainly facing four different types of financial risks which are liquidity and funding risk, interest rates risk, foreign currency fluctuation risk and counterparty risk. The company has the policy of not using the derivative for the speculation purpose and is not issuing financial instruments except where it becomes the legal necessity. To manage the liquidity risk, the company is borrowing money from banks, issuing medium and short-term notes under its medium-term note program. To hedge the interest rates risk company is using a mix of fixed and float rate loans, swaps, and other financial instruments. M&S is also providing the hedge cover to its foreign currency risk.

For this purpose, the firm is using forward contracts of 18 months to manage the currency rate fluctuations. Counterparty risk arise when the company has the chance to incur losses in the case of default or nonperformance of the financial institution. M&S has made a policy to balance the counter party risk by limiting a certain amount of funds with specific types of counter party. The firm has also decided to make the financial deals with A+ Rating financial institution so that there is the least probability of loss in the case of their default. Figure 5 in the appendix is the snapshot of the results company is managed to provide hedge cover to its balance sheets and ultimately to its shareholders. From a glance at figure 5 in the appendix, it is evident that firm has successfully managed to cover its interest rates and currency risk by the appropriate use of financial instruments like option, forward foreign currency contract, and  cross currency cash flow hedges. These arrangements have balanced the gain and loss on the transactions and thereby mitigating the risk from the balances sheets of 2007 and 2008.

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