Identify and describe two financial management practices that firms use to manage each of the following: (a) liquidity risk; (b) interest rate risk; and (c) credit risk.

a. Liquidity Risk

- Reduce Cash Conversion Cycle

Management tries to reduce the Cash Conversion cycle which is the time taken for proceeds to be received from inventory. By reducing this period, the company can have more cash.

- Maintain Cash Reserve

Maintaining a cash reserve that the business can fall back for contingency helps the company maintain liquidity. This amount should not be too small that it cannot help neither should it be too big that it hinder investment opportunities.

b. Interest Rate Risk

- Derivatives

Buying a a Derivative aimed at reducing interest rate risk can reduce it. Derivatives such as Interest Rate Futures will allow the company is make sure that they get a particular rate in future.

- Use more complex and accurate models to predict Interest rates and take measures against the fluctuations.

c. Credit Risk

- Use of Bond Ratings

Ratings will tell how risky the bond that is to be acquired is. If the Rating is quite low then the Credit Risk is high.

- Credit Default Swaps

This is a method of reducing Credit risk by insuring the Security in question against losses. This is usually done by the Issuer as an added requirement of the transaction.

answer; swot analysis;