Description
Select a company of your choice, one that has been dealing with risk and uncertainty within the last six months, and write a 6–8 page paper in which you:
- Evaluate a company's recent actions (within the last six months) dealing with risk and uncertainty.
- Offer advice for improving risk management.
- Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.
- Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.
- Identify a principal-agent problem in your company and evaluate the tools it uses to align incentives and improve profitability.
- Examine the organizational structure of your company and suggest ways it can be changed to improve the overall profitability.
- Use at least five quality academic resources in this assignment. One reference must be about the risk and uncertainty the company has faced in the last six months.
- Note: Wikipedia, Investopedia, Course Hero, and similar websites are not acceptable references.
- For the best results in your search for resource material, visit the Research Hub.
Explanation & Answer
Attached.
Running head: FACEBOOK
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Facebook
Name of Student
Institution Affiliation
Course
Date
FACEBOOK
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FACEBOOK
Introduction
Facebook is an online platform that offers social media and networking services. It is
located in California, USA. The company faces risks and uncertainties in its operations. It also
experiences adverse selection problems, moral hazards, and principal-agents problems. The issues
faced, and some methods of solving them have been explained.
Dealing with Risk and Uncertainty
Facebook faces risks and uncertainty in its computations. There are four strategies that the
company has been using to deal with risk and uncertainty. The company takes the primary
competitive position and evaluates how various approaches can be modified to manage risk and
uncertainty. It is assumed that there are two fundamental types of shock. One is due to risk, and
the other is due to uncertainty. Risks are Hedgeable by using insurance or using derivatives, while
uncertainties are not Hedgeable in financial markets.
The first strategy is the benchmark strategy. According to Sudret et al., 2019, this strategy
would be appropriate if the risky variables were close to the values expected, and if uncertainty
does not threaten the survival of the company. The company can withstand more shocks if it has
access to adequate capital. The benchmark strategy is appropriate if the firm does not let risk and
uncertainty affect decision making on the type of products to produce and sell. Financial hedging
is the second strategy for dealing with risks and uncertainties. The primary role of the financial
hedging strategy is to make the firm’s value less sensitive to changes in risk factors. It is assumed
that a small cost to set up the ability to engage in financial hedging. Under the financial strategy,
the profits accrued are lower than the value of risks and are almost similar to the expected value.
FACEBOOK
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The flexible strategy recognizes that risks can be of different values and expects a shock
due to uncertainty. This strategy allows firms to design operations and procedures which respond
quickly and make the best of the conditions. Therefore profitability increases with an increase in
the variance of the conditions. There is also operational hedging. This strategy involves altering
operations and processes to make profits to be less sensitive to varying risk factors and uncertainty
shocks. The operational hedging strategy is useful when there is high uncertainty and hard to access...
