FINANCIAL FUNCTION GUIDANCE IN RISK MANAGEMENT

Abstract

Financial policy represents the guidance for decision-making process about fundamental financial goals in a company. We accomplish it with the financial management. One of financial functions goals is financial risk exposure reduction. That is the main reason why companies must incorporate the risk policy and guidance into financial policy. Financial risk guidance depends on risk profile and organisation’s attitude to risk. In accordance with these basic directions, we establish risk identification and measurement techniques, instruments for risk management and requirements for reporting to concerned parties. We can manage risk with internal methods, on spot financial market or with external instruments, represented with derivative instruments. Resulting from the basic risk management guidance, we establish the accounting guidance. This determines recognition and measurement rules for derivative instruments, which depend on the motive for derivative instrument acquirement. The most common motive for using the derivative instrument is financial risk hedging. We affect the planned cash flow realisation with hedging activities, which affect the realisation of planned profitability and company value.

Keywords

• financial function, risk management, derivatives, financial risk disclosure.