RISK MANAGEMENT POLICY
Risk management is an important aspect of Limura’s business. The ability to react in advance and in a sophisticated manner to risks that may arise in the daily activity of Limura provides the Company a competitive advantage and gives management the tools to conduct business in a secure manner.
Limura employs a Risk Management Officer whose function is to cover three pillars of risk; market risk, credit risk, and operational risk:
MARKET RISK
Market risks are risks specifically related to investments. These risks are defined by the behaviour of the market overall, and can be caused by industries unrelated to Limura’s line of business. This means that any market fluctuations in any area can potentially affect the company’s investments. The following are the main market risks:
Interest Rate Risk
This risk is caused by changes in interest rates. Volatility in interest rates can cause the value of fixed-rate investments to decline, so maintaining awareness of interest trends is vital.
Country Risk
Country risk is defined by the economy of wherever you are making investments, and the economic or political stability of that country. This stability can be affected by political unrest, natural disasters, international relations, disease outbreaks, and similar large-scale events.
Currency Risk
Currency risk depends on foreign exchange rates. If the value of the currency used to make an investment goes down, the value of the investment will also fall. Or if you owe money in a foreign currency, the true cost of paying off the debt could rise or fall depending on how that currency moves in relation to other currencies.
Liquidity Risk
Liquidity risk refers to how easy it is to turn an investment into cash flow. An investment with high liquidity risk will be difficult to sell off, whereas one with low liquidity risk will be relatively easy to sell for market rate.
How Limura manages market risk
While it is impossible to eliminate market risk entirely, Limura manages its investments in such a way that loss is minimized, making it easier for the company to reach its financial goals. The Risk Management Officer focuses on the risks associated with fluctuating price change and liquidity. The portfolio is analysed daily, considering the correlated risks and thereby allowing the company to navigate potential risks. The following are some of the ways Limura minimizes market risk:
By hedging its investments
When trading in gold, hedging is an investment strategy that minimizes the potential loss Limura might incur should gold value falls. This is done by purchasing a futures or an option, which will give the Company the right to sell its gold at an agreed-upon price should its value begin to dip. The Company may not see as high of a return on its investment as it would otherwise, but it’s an appealing method for those who do not wish to take on an extreme amount of risk.
By diversifying its assets
A simple strategy for managing market risk is to avoid making all of the investments in the same sector. Diversification of the asset classes can assure that a loss in one area will be offset by stability or gains in others. This isn’t a guaranteed defence against risk, as any market shifts can affect the investments; but strategically choosing the investments and derivatives can help protect Limura from truly devastating loss.
Limura stays well informed
Being aware of market changes and how fluctuations might affect its investments. Limura won’t be able to predict the future with perfect accuracy, but staying up to date on the gold & gems market and its movement’s helps the Company know when to buy, sell, and hold.
Limura waits it out
If the value of Limura’s gold stock dips, Limura doesn’t panic. Minor changes in the market may have temporary effects that Limura’s accounts will be able to weather over time. Before selling, the Company observes the trends the market is exhibiting overall and determine whether it can afford to hold on to a long-term investment.
CREDIT RISK
In essence, credit is the risk of losses arising from the borrower’s failure to meet contractual obligations. For most companies, trading on open terms is the largest and most obvious source of credit risk as the client fails to pay on time and in full. There are three types of credit risk:
Credit default risk
Credit default risk refers to the probability that a borrower will default on or fail to make full and timely repayment of debt.
Concentration Risk
The concentration risk is the disproportionate large exposure to a single debtor or group of debtors relative to the size of the credit portfolio.
Country Risk
Country risk is the risk of a sovereign state freezing foreign currency payments or defaulting on its obligations due to economic, political, or social instability.
How Limura manages credit risk
Risk Management department identifies, measures, evaluates, mitigates, monitors, reports, and controls credit risk. Risk management begins before a customer is on boarded, and continues throughout the business relationship with the customer. Here is how Limura sets up the credit risk management process.
Limura does due-diligence
Limura’s Compliance department reviews the Know Your Client (KYC) document and verifies the client’s information and assesses the credit rating of the client with credit rating agencies.
Limura asks for a payment guarantee
Limura’s trade procedures are safe and secure. Limura will always ask for the client to arrange a payment guarantee - Irrevocable Letter of Credit (ILOC) or Standby letter of Credit (SBLC) - from a top 100 World Bank Via MT760 to secure the value of gold to be delivered.
Limura diversifies its income sources
The chances are that one of Limura’s income source or customers might suffer a financial crisis. However, the likelihood of that happening to several clients at the same time is small. Therefore Limura has multiple sources of income and wider customer base so that the Company can-not go through a significant negative impact.
OPERATIONAL RISK
The Risk Management Officer covers the risks associated within Limura’s Trade Lifecycle and potential losses that may arise from its day to day activities in relation to trading activities. Operational risks are an integral element of gold trading and physical supply. They cannot be wholly avoided, but can be planned for and managed. Operational risk can result from:
- A breakdown in internal procedures
- Human error
- Disruption to business practices
- System failures
- External events (such as natural disasters or, yes, a pandemic)
- Inadequately trained staff
- Employees’ participation in fraudulent activities
- Cyberattacks and data breaches
In general, operational risk can come from: Technology, hardware, software, cybersecurity, privacy, people, employees, Vendors, customers, stakeholders, regulatory and compliance demands.
The practical upshot: ongoing operational risk management is essential to minimize the threat of operational risks.
How Limura manages operational risks
Limura applies a range of risk management tools to minimize overall exposure at any one point in time. These include:
- Financial derivative instruments to hedge commodity price and foreign currency exchange rate risks
- Insurance to hedge various operational risks including freight-related and political risks
- Due diligence prior to acquisition and good management after acquisition to hedge environmental risks
- Ready access to sufficient capital and funding to hedge liquidity risk
- Strict policies and procedures to hedge counterparty relationships, fraud and regulatory risks
- Avoid the risk, such as by choosing a vendor with more robust internal controls for cybersecurity
- Accept the risk if the benefits outweigh the costs
- Control the risk to decrease its harm