Financial risk management (FRM) can be defined as the practices by which a firm optimizes the manner in which it takes financial risk. The risk management also can defind are the risk reduction through safety, quality control and hazard education. It is also the alternative risk financing include the self-insurance and captive insurance. (www.riskglossary.com/link/risk_management.htm)
Financial risk management is process to deal the problems that affect the risk of the company. It is also to detect the problem of the company in their financial risk and it could manage the detecting when the companies know their problems earlier. Addressing the financial risks proactively may provide an organization with the competitive advantage between the other companies. It also to ensure on key issues of risk that management from the operational staff, stakeholders, shareholders and the board of directors are in the agreement of the company.
The values of derivative are come from the futures, forwards, options, and financial risk management is important to create the economic value in a firm. For the measurement risk explosure of the financial instruments particularly is using the operating risk and the market risk. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to the risk. (www.frmhedge.com)
The group is exposed to various financial risks where the market risks, it's the including exchange rate risks, interest rate risks to determining the fair values, cash flow interest rate risks and other price risks, credit risks, operating risk and liquidity risks of the company. Risk management also focuses on the financial markets to minimize the potential negative effects of this on the group's financial performance when the problem of the company was detection.
1.1 BACKGROUND OF STUDY
Financial risk management is refers to the practices used by corporate finance managers and accounts to limit and control in the firm's in total portfolio. The possibility of an economic downturn will get a negatively impact to the company. Financial risk management is important to minimize the risk of the financial loss when the company detects the risk of their management. The company can minimize the risk using the unexpected changes in the prices of currencies, interest rates, labour, and equities. For example, launching a luxury product immediately, before or during a recession can carries a great deal of economic risk to the company and the country.
Furthermore, managing financial risks is important because these risks may cause a negative impact on the cash flow of the company. The findings of this study would help owner of the company to know the types of financial risks that they would face and know the strategies to reduce the risks. The impact of these flows on many institutions in the country will shocked the industry.
Refer to the journal of risk exposure the risk management can be measured by using the operating risk or bankruptcy, market risk and many more. The risk management is so large in the measurement, so according to this study it can measure by operating risk of the PROTON BERHAD to know their problems that happen. Refer to the Basel Committees, they said that the operational risk as the risk of loss can be resulting from inadequate or failed internal processes, people and systems or from the external events in the country. The promoted a holistic definition of operational risk being considered to encompass all risks other than those captured by credit and market risks.
1.2 OPERATING RISK
The operational risk management should be an effort to measure and control of the operational risk, rather than an exercise in efficient capital allocation (Samuel Theodore, and Moody's June 2002). Its mean that, the effective for operational risk management will continue to remain decrease by the qualitatively stronger elements such as healthy risk culture, effective operational risk management, tight procedures and controls, performing technology, and good in qualified to industry.
Refer to the journal of Risk Exposure during the global financial crisis the risk can be measured by leverage ratio from ratio analysis (Abdelaziz Chazi and Lateef A.M.Syed, 2010). In this study, it focuses on the debt management ratios and prohibited industry from further lending. In this journal, the leverage ratio can be calculated as total debt divide by tangible assets. This formula is same as to the debt ratio in financial ratio. According to the (Austega, 2010), the principles approach is come from the ways that the credit and market risk are measured. It provides to measure the operational risk for an entire organization to the collect the sufficient clean data refer to the debt or risk management.
1.3 BACKGROUND OF COMPANY
Perusahan Otomobil Nasional Berhad (PROTON) was incorporated in 7 May 1983 where largest of the automobile brand that produces in Malaysia. It also assembles and sells motor vehicles and related products, including accessories, spare parts and other components of the car of the company. The Malaysian Prime Minister, Dato' Seri Mahathir Mohamed is originally created the idea of a Proton car in Malaysia that launched on 9 July 1985.
PROTON BERHAD is an originally designed for a capacity and is associate companies which involved in manufacturing, research and development, sales and services activities. Besides being shareholders, the Mitsubishi Corporation and Mitsubishi Motors Corporation in Japan are also PROTON's technical assistance partner and component supplier. This means that the PROTON BERHAD takes the component of cars at the Japan country.
During of the global economic crisis to batter the global automotive industry, the Proton brand reduced of automobile history. Beside that, the Malaysian automotive industry suffered a worryingly starting 2009 because of the reducing in their sales. Therefore, the Government of Malaysia tries to increases their effort to increase sales in their effective immediate and proactive action. Thus, it will contribute to Malaysia's attainment in increase the profits of company same as the Vision 2020.
1.4 PROBLEMS STATEMENT
The PROTON BERHAD is the largest of the automobile in Malaysia that the first model car was produces, such as Proton Saga in year 1985. In 1987, the sales of cars had captured about 65 percent in Malaysia. Nowadays, their market of the price of national cars had decrease in their sales. From this study, it is to show whether the interest rates, export, import and labour are affecting the financial risk management or not. The main problem from this study is, is the interest rates, export goods and services, import goods and services and the labour forces were affecting the financial risk management (operating risk) of the PROTON BERHAD in Malaysia.
Therefore, this research is conduct to answer problems statement that affects Financial Risk Management (FRM) performance in PROTON Company in Malaysia. The problem statements in these studies are the first, is the interest rate is affect operating risk in PROTON's company in Malaysia? Secondly, are the export goods and services that affect the operating risk company in Malaysia? Third, are the import goods and services affect these operating risks. Lastly, the problem statement is, is the labour force affecting the operating risks in Malaysia.
OBJECTIVES OF STUDY
1.5.1 General Objective:
The primary objective of this research is to study on the factors affect of Financial Risk Management (FRM) in the PROTON Company in Malaysia.
Specific Objective:
The research will found several objectives in the study of financial risk in PROTON industry in Malaysia. These objectives are related with the problems statement. The purposes are:
To study the FRM of the PROTON industry in Malaysia from March 2000 to December 2010.
To investigate the relationship between the financial risk management (operating risk) and interest rate base lending of PROTON BERHAD in Malaysia.
To identify the relationship between financial risk management and export goods and services in the company in Malaysia.
To examine the relationship between financial risk management and import goods and services in the company in Malaysia.
To ensure the finance risk management have relationship with labour in PROTON industry in Malaysia.
SCOPE / LIMITATION OF STUDY
1.6.1 Space Dimension
The limitation faced is the relatively small sample size of this research. It focuses in industrial company in Malaysia's country. The company that was chose is PROTON. Its also focus to making research about what the company affects their financial risks management. It embodies a unique set of perceptions about the products and services that are triggered in the minds of public by how they judge, what they do, how they behave, and what they say.
The next limitation is that the findings data from the Bank Negara Malaysia. The quarterly of risks of the company was used to analyze. Another limitation of this study is that while there are many other categories of risks in Malaysia's construction industry, this research focused only on the financial risks. Further studies on other risks such as operating risks and bankruptcy would be carried out. The population comprised the worker, clients, consultants, specialist and suppliers, who had exported the construction services or products to Malaysia.
1.6.2 Time Dimension
The range of data covered in the study is ranges from 2000 to 2010 based on quarterly and the number of observation is equal to 44. From the descriptive statistic analysis, this research time dimension is from March 2000 to December 2010 to get the result from it. It used about 44 in quarterly to complete the data of the research study.
1.7 SIGNIFICANCE OF STUDY
The significant of study for the distributer and manufacturer are to identify what the factors are affect the sales national cars beside economic factors in financial risk management. For the government, it gives a picture for the scenario of the PROTON industry in Malaysia and what will be happen beyond the implementation AFTA. Thus, it can help the government to take early action to protect the domestic market, especially the national cars. Refer to the researcher, this study give the researcher knowledge about the automobile industry in Malaysia.
The important of the research in FRM is to minimize the risk of loss from unexpected changes in the prices of currencies, interest rates, commodities, equities and other risks. On the other hand, this is important because these risks may cause a negative impact on the cash flow, endanger a project's viability and limit profitability to the company.
This study is important to the companies and firms because it can improve the enterprise value in Malaysia's the current economic environment, so to provide a theoretical and practical insight into PROTON in Malaysia's risk management value theory and important to investigate how foreign firms manage financial risks when operated in Malaysia's construction industry. The findings of this study would help the firms to know the types of financial they would face.
