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Problem Solving

88 SAVED IDEAS

Many companies use the insights of financial managers and external consultants to manage their risk. A one-size-fits-all solution is not yet in existence when it comes to risk management.

These companies usually use derivatives like forwards, options, swaps and futures to offset their risk, but without a clear set of risk-management goals, the use of derivatives can increase the risk substantially.

@pau556

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Problem Solving

Top-level managers and financial engineers must work in tandem to develop and execute a strong risk-management strategy. The three basic premises for this corporate strategy are:

  1. Creating corporate value by making good investments.
  2. Generating cash internally to fund the investments.
  3. Having a strong cash flow.

The single goal for this strategy is to have enough cash available to make value-boosting investments.

Future markets are nothing new, and before the stock market, they existed in many places in the form of crop trade, back in the middle ages.

Farmers would hedge their risks by selling their crops to consumers at preset prices on a predetermined future date. This provided assurance to a risk-averse farmer that his crop price would not fluctuate in the future.

Corporations managing risk themselves face a fundamental question: why do they need to do it? Individuals and investment groups can manage the risk on their own. Making good investments seems like a better option.

Hedging bets are mostly fictional transactions that don’t affect the value of any operating asset of the company, making it a loss-making proposition if the transaction costs and other overheads are added up.

Risk management through hedging allows companies to borrow from themselves, transferring funds to where they are needed the most.

  • The main objective of risk management is that the company should have cash available for making value-enhancing investments.
  • Companies prefer to fund their investments with internal, retained earnings, and not through any outside equity. External financing is seen as a costly affair.
  • Multiple studies on companies managing risk using hedging strategies reveal that it is almost a zero-sum game and does not insulate them from all kinds of risks.

Top leaders and managers can benefit from these broad guidelines on risk-management issues:

  1. Companies in the same sector need not necessarily have the same hedging strategies.
  2. Companies can benefit from risk management strategies even if they don’t have any major investments in assets or real estate.
  3. No-debt companies having lots of cash can also take advantage of various hedging strategies.
  4. Multinational companies (MNCs) need to recognize that foreign exchange risks affect both the company cash flow and investment opportunities.
  5. Companies should pay attention to what strategies other companies, especially their competitors are devising.
  6. Senior managers should not delegate risk management completely to financial specialists, as it can be misaligned with the company's broader vision.
The importance of focusing on the similarities

When we look at situations, we prefer to look for what is distinct. Instead, we should pay attention to the similarities.

The four words "this time is different" makes us incorrectly think that differences are more valuable than similarities. When your reasoning and plans are based on the differences, you are probably speculating.

When we focus on the differences, we lose touch with the evidence that the similarities point out. The history of a matter provides context.

  • Consider investors and the dotcom bubble. People saw it as unique. We reasoned that everything would change, and everyone who owned internet companies would prosper. Suddenly profits didn't matter, nor revenue. We thought it would come in time. Market share mattered regardless of the cost to acquire it.
  • We got caught up in the differences and forgot to look at what was the same. Had we looked at the massively transformational industries, such as automobiles, we would've seen that of all the 70 different auto manufacturing operations in the United States, only 3 survived.
The triple constraint factor

The triple constraint theory tells us that every project operates within the boundaries set by three constraints:

  1. Time (the deadlines)
  2. Scope ( the features)
  3. Cost (the budget)

These constraints are inter-connected. If you change something about one of them, the other two will be impacted as well. A manager has to find the best combination of these three constraints.

Each task and process in the project have a scheduled time allocated for their completion.

Steps for managing the schedule of the project development process:

  1. Plan schedule management.
  2. Sequence all of the different activities.
  3. Define all of the activities that will be performed in the project.
  4. Estimate the usage of all of the resources that are going to be used in the project.
  5. Estimate the time durations related to each activity.
  6. Develop a proper schedule after analyzing the first five points.
  7. After creating the schedule, control/manage the schedule to ensure that your project is on track.

The budget processes related to the project include estimating the cost of all the little parts.

Methods to estimate the cost of the project.

  • Use historical data. Track and analyze a project similar to yours, which have been developed in the market over the past years.
  • Determine the resource costs. Track the costs of the goods and labor that are going to be used on a per-unit basis.
  • Use different parameters. Measure different stats from the old and new data found in previous and on-going projects.
  • Use bottom-up approach. Track the lowest to highest budgets spent on previous projects.

Other methods for budget estimation are vendor bid, reserve, and quality analysis.

The scope of the project is defining the tasks and activities that are being done in the project development process.

The scope document includes:

  • All the details of the project development process from start to finish.
  • A trajectory in which the project will travel.
  • Information about the potential risks and scope creeps.

In recent years, constraints beyond the triple constraint factor have been discovered. They are:

  • Quality. The project should be developed according to the quality agreed in the project scope.
  • Risk. Risk and scope creeps are "silent" killers when the development team and managers are not expecting any threat from them.
  • Benefit. The benefit of the project element is a great motivator to keep the project development process on track.
The Problem Of Writing A Conclusion

Many authors, article writers and content writers draft samples without a proper conclusion or a wrap-up.

Beginner writers can try to follow the advice on structuring an essay or thesis statement, given by English teachers: “Tell ’em what you’re gonna tell ’em, tell ’em, and then tell ’em what you told ’em.”

Other than that, complex ideas are sometimes difficult to summarize, and there is conflicting advice available, which can be confusing.

Once an author has stated the idea and offered evidence and anecdotes to support it, the concluding part has to answer the ‘so what?’ question that can crop in the reader’s mind, usually when the end of the article/paper is near.

The reader is satisfied once the main take away is clear, and the questions “Why is this important?” Or “Why should anyone care?” are adequately answered.

A personal touch is a nice trick to create an impactful conclusion.

The readers will identify and would feel a connection with the personal story humanizing the subject at hand.

If something resonates or lingers in the reader's mind, long after the article has been read, then it is a sign that the conclusion was impactful and created an impression.

Asking a direct question or creating a personal challenge makes them think about that idea, and apply it to their lives.

Take time out to rest

Sleeping 8 hours a day and taking a time-out to rest is crucial.

Give yourself time to recuperate, in order to perform better at any task, and to recall better what you have studied.

Make focus a regular part of your lifestyle, by practicing it progressively on a daily basis.

This means making a commitment to stop using your smartphone for a few hours daily, or not checking it first thing in the morning.

Cal Newport
Don’t take breaks from distraction. Instead take breaks from focus.
Find and develop a routine

A routine will ensure your time is well utilized and you have less unexpected distractions.

Get yourself comfortable in your study table or a cafe where you will not be disturbed, and can tune-out the music or noise to focus on your study work.

Doing one thing at a time

Commit to what you want to study on a particular day, or for a few hours. Limit the number of tasks/distractions/subjects so that you keep your intense focus and actually complete the tasks you started.

Protecting your blocks of focus

Get rid of shallow, low-intensity work and stuff like checking social media on your smartphone, while you focus on your study work. Keep yourself distraction-free at least for the few hours you are studying.

A weekly plan

While focusing on one topic in a day, it helps to have a weekly plan to organize yourself and map your study hours.

The way our mind works

Our brains are wired to work on tasks serially, and not in parallel. This means that we are not wired for multitasking - we are good at focusing on one thing at a time.

The problem is, there are so many distractions these days that we've unconsciously trained our brains to not be good at focusing.

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