The company plans its operations well in advance. These plans are based on an analysis of past activities and estimated forecasts. When the actual result matches with the planned result there is a gain but when the actual outcome is different from the expectation there is a loss. Despite this the activities of the company are based on the forecasts. This means that the company is taking a risk. Suppose, there is a company X Ltd based in US. A research by the company reveals that there is a good market for its product in Canada. To tap the Canadian market the company wishes to start its operations in Canada. For a new project the company requires funds for buying equipments, employing man-power, procuring materials etc. The funds required for setting up its new operations can be obtained as loans from financial institutions. But the availability of loan depends on the market conditions. It is difficult to obtain loan in a tight monetary market. During these times the company has to pay a high rate of interest for securing loans. This raises the interest obligations of the company. Moreover the company is also subject to the risk of interest rate fluctuations. This is called interest rate risk. If the company avails a floating rate loan, a rise in the rate of interest pushes up its interest cost. This can be hedged with the help of swaps and derivative instruments (Nawalkha et al, 2005, P1).
The material constitutes the most important part of the input. Its non-availability can have an adverse impact on production levels. If the company relies on a single supplier then it can be exposed to the unjust demands of the supplier. This can give rise to instances of short-supply, unfair prices etc. On account of his supreme position, he can demand for unfavourable terms of credit. If the supplier has a monopolistic position in the market he can ask for higher prices for the