Risk Assessment. The business of Tesco Essay Example | Topics and Well Written Essays - 1750 words

Risk Assessment. The business of Tesco - Essay Example Tesco has its retail stores spread over 14 countries all over the world and also holds the leading market share in the retail markets of UK. The primary products of Tesco include the retail grocery items and other retails consumer products that are being sold through its departmental stores, supermarkets and the retail chains. The economic liberalization policies adopted by the policy makers have resulted in the increase in the number of players in the retail grocery markets of UK and in other countries. In order to attain sustainability of business, Tesco has diversified its product portfolio with the activities of retailing of clothes, electronic items, music DVDs, books , financial services, etc (Tesco 1). Vulnerability to risks The business of Tesco which is spread in several countries all over the world is vulnerable to several risks. A list of risks to which the business of Tesco is vulnerable has been given in tabular form below. Sl. No. Risk 1 Interest Rate Risk 2 Foreign Cur rency Risk 3 Liquidity risk 4 Credit Risk 5 Insurance Risk The two major risks to which the business of Tesco is most vulnerable are the interest rate risk and the foreign currency risk (Frank 174). Due to the increase in interest rates as an outcome of the monetary policy, the interest payout in the form of debt liabilities are likely to increase (Weston 24). This would result in increased cash outflows which reduce the net income of the group and also lesser repayment of debt and liabilities. This is risky for Tesco as they would continue to have higher proportions of debt with respect to the equity (Tesco 1). The foreign currency risk is the uncertainty that Tesco faces due to the fluctuation of currencies in the local markets. As a result of the depreciation of the local currency, the currency conversion rates between the local currency and Pound Sterling would be affected (Cowan 96). This poses the risk to Tesco as foreign currency fluctuation would result in reduction of reven ue earnings of the group and the volume of profits repatriated to the home country would also decrease (Whaley 226). Probability The probability of the two risks, namely the interest rate risk and the foreign currency risk have been explained as follows based on the information available from the annual reports of Tesco and the events that have occurred in the last financial year. The interest rate risk poses uncertainty to Tesco as the company is subject to fluctuation of interest rates by the central banks in several countries (Sullivan and Sheffrin 172). As per the information available from the annual reports of Tesco, it has been observed that the company had to bear the cost of increase in the interest rates implemented by the central banks. As monetary policies and in order to control the inflation rates in the economy, the increase in the interest rates has been implemented by the central banks in many countries where Tesco runs its operations (Brown 341). Thus the cost of d ebt incurred by the company has increased (Handlechner 36). The probability for the fluctuation of interest rates has been assumed to be 60% looking at the trend of impacts on the financial parameters of Tesco’s performance. It is highly probable that the foreign currency conversion rates are further going to fluctuate as the economies are in the mode of restructuring after the occurrence of the global financial crisis (Hennessy and Zechner 271). The uncertainty in the foreign currency conversion is likely to have a cascading effect on financial performance of Tesco. The cost of finance obtained by Tesco in the local mark