What did Carlos Ghosn and Nissan do in order to manage global financial risk and why?
Did Nissan follow Napolo's (2005) 8 steps? Discuss which steps they did and those they did not follow.
Nissan Motor Company is one of the leading global automobile manufacturers. It produces cars of different segments, especially small ones along with some of the SUVs. The company had gone through a series of losses during the 1990s before Carlos Ghosn started functioning as CEO to lead the management of the company. In the first section, there is an explanation of eight step process to mitigate risk in an organization.
Eight Step Process in Nissan Motor Company
Nissan Motor Company, under Carlos Ghosn, went under a huge round of restructuring, where management to the functioning was changed, and aligned with the global business environment. Carlos Ghosn followed a risk mitigation process that included an eight step process. These steps are explained below:
Step 1: Definition of Corporate Philosophies and Objectives
The first step in the eight step process is to define the objectives in order to establish a framework for policy. The corporate objectives and the principle business lines are highlighted and risk-taking areas of the company are stipulated. The risk may be operational, financial, technological or any other. Most of the companies identify risks that can be hedged away, such as foreign exchange, interest rate and commodity risks, as these could affect the financial performance of the company.
Step 2: Identification of Exposures
Here, the management has to identify the key exposures that are under the headings of transactional, translational and economic exposures. Transactional exposure is about selling or buying in any foreign currency while translational exposure relates to protection of the value of overseas investments and reported income. The most difficult exposures to capture are economic exposures, as they bring issues arising from foreign competition. It is useful to include the policy of glossary of terms or acronyms that are unique for a company's day to day operations (Napolo, 2005).
Step 3: Quantification of Exposures
This step firstly measures the intensity of exposure to look out for its importance. There are some measurement techniques for this purpose that can vary from company to company, depending on their need. Some companies prefer sophisticated modelling techniques, such as value at risk to measure exposures while some other go for measuring recent, historical changes of currency relationships and their impacts. These approaches work according to the significance of an exposure. Hedging should be done proportionately to the exposure.
Step 4: Defining risk management policies and procedures
This step is about the identification of actions and responsibilities. The management identifies exposures that present significant risks to the company. After the ...
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