• Risk management framework

    Chapter 3 - Cotton marketing - Risk management – A cotton supply chain manager’s perspective


    Figure 3.6 below highlights the sequential steps required to institutionalize a risk management framework in an organization. 

    Figure 3.6: Risk framework

    Identification of risk. Identify the key risks in a business. For example, the key risks for a cotton supply chain player are cotton outright price risk, cotton basis risk (physicals prices with respect to futures), credit risk, counterparty risk on unshipped purchase/sale contracts, documentation risk (for L/C negotiation), currency risk etc.

    Risk control policies and procedures. Implement risk policies and procedures for managing the risks identified above. The business should also set up risk review mechanism to ensure adherence to risk management policies and constantly update risk control policies to adapt to new categories of risk.

    Risk limits and risk capital allocation. The board of the company should decide the overall risk capital that the company is willing to stake. The company management can then allocate this risk capital (or risk limits) to the various business segments at unit level.

    Risk capture, measurement and reporting. After the risk limits are finalized (and only then), systems and processes should be implemented to capture risk data, measure the quantum of risk, and review, monitor and report risk exposure with respect to approved limits.

    Aligning systems. Aligning performance evaluation systems and annual incentives is the most crucial aspect in effective implementation of a risk management framework. This provides the crucial link in developing a healthy risk culture and communicates top management’s efforts tomaximize returns in relation to risks.

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    Cotton Exporter's Guide

    Brochure - African cotton promotion
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