The primary objective of any company is to maximise shareholders' wealth. The main criteria for a finance manager while taking a financial decision is to maximise returns and minimise risks. Corporations are increasingly being exposed to a global environment where the future is not only dynamic but also uncertain. This uncertainty brings with it considerable risks which need to be addressed with utmost importance.
Companies may face the following kinds of risks:

• Credit risk: The risk arising out of the chance of default of payment
• Operational risk: The risk arising out of lapses in internal control and procedures
• Market risk: The risk arising out of appreciation or depreciation in value of assets
• Currency risk: The risk arising out of an appreciating or depreciating rupee
• Interest rate risk: The risk arising out of the volatile nature of interest rates
  
  

With the help of probability theory and careful evaluation of the environment, companies are now able to predict, to some extent, the impact of these risks on their business. Ignorance or mismanagement of risk could result in loss of shareholders' wealth and loss of reputation along with other undesirable consequences.
A number of cases have occurred in the recent past which brings to light the lack of foresight and pro-activity on the part of the management in managing risk.� The recent sub prime crisis in the US is a glaring example of the consequence of inability to identify and mitigate risks effectively.
The entire process of identifying, evaluating, controlling and reviewing risks, to make sure that the organisation is exposed to only those risks which it needs to take in order to achieve its primary objective, is known as 'risk management'; which makes an integral part of managing a business.
Risk cannot be eliminated. However, it can be:

• Transferred to another party, who is willing to take risk, say by buying an insurance policy or entering into a forward contract;
• Reduced, by having good internal controls;
• Avoided, by not entering into risky businesses;
• Retained, to either avoid the cost of trying to reduce risk or in anticipation of higher profits by taking on more risk, and;
• Shared, by following a middle path between retaining and transferring risk.
  
  

There are various tools available to the management to manage risks. Namely derivative products like Forwards, Futures, Options and Swaps. The measures can be better internal controls in place, due diligence exercises, compliance with rules and regulations, etc.
Risk management is a proactive process, not reactive.� However, there are large numbers of companies which are still ignorant or chose to ignore the importance of risk management and deal with situations as and when they arise. It is time the management of such companies sit up and take note of the risks that their company faces.