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. Definition and general risk
The risk in its general dimension covers any event that may prevent an organization to achieve its objectives or maximize performance.
The concept of risk in finance is similar to that uncertainty. The risk of a financial security, asset or a financial liability can have several origins.
We distinguish including economic risks (political, natural, inflation ...) that threaten flows titles and come from business, and financial risks (capital, currency, interest rate, duration ...) that are not not directly on these flows and are specific to the financial sphere. Whatever its nature, the risk is reflected in a change in the value of financial security. This is also what distinguishes pure accounting, which is only concerned with rates of return, and finance, which incorporates the concept of risk to determine the value.
It is also considered a risk or potential loss dependent on market changes, or the appearance of an event
When cash flows, discounted at a future date, can not be predicted with certainty in a financial decision, there is risk from this uncertainty. The consequences are the appearance of poor results below expectations, that is to say, lower returns than expected, as higher yields than expected.
In the first case, we speak of negative risk or downside risk, that is to say, the risk that results from down. In the second case, we speak of positive risk or upside risk, that is to say, the risk that results from upward. These two situations, put the risk manager or risk manager facing a multitude of possibilities, in order to be able to optimize the management of financial policies and decisions, and demonstrate the need for risk management on this. However, the concept of risk in the financial sector is vast. In this regard, there are several types of risk inherent credit risk, country risk, market risk, operational risk and market risk.
. Risk Type
Risks are classified according to a typology, and present specific characteristics with respect to each other, we will explain in the following paragraphs:
Credit risk
Credit risk, refer to the inability or willingness of a customer (company, financial institution, company, trader, organization ...) to meet its obligations and financial commitments to the banking institution, to maturity. It is therefore a risk of default loan repayments. This risk typically arises from the financial deterioration of a borrower, thus increases the default.
If it was originally a concern for only banking institutions, yet it affects all companies, through loans they grant, and also short-term loans. This risk is indeed heavy consequences for any company any outstanding debt is economically a dry loss support creditor, which is reflected in the results of the company.
Country Risk
Country risk is the inability of a country to meet its obligations for reasons of factors beyond its control, due to the environment, relative to exogenous factors. So the fear that a state can not meet its commitments to its partners about, banking and financial institutions, donors.
Therefore, it encompasses two components: political risk (measures taken by the authorities of the country or of internal and external events, such as wars, political instability, social and political crises) and economic and financial risk (covering the micro and macro - economic policies, monetary policies, such as the case of a recession, currency depreciation ...)
Market risks
Market risk is the risk of loss due to adverse changes in market parameters or volatility (interest rates, exchange rates, equity prices or raw materials, the time dimension), leading to negative consequences the positions of the company or the bank or financial institution. All changes its settings accordingly to the portfolios held or positions
operational risks
They result in losses due to inadequacy or failure in processes, people or systems (human error, system failures, fraud, commercial disputes, failure of information systems, malignancies, accidents ... ) or losses resulting from exogenous factors in the external environment (natural disasters, fire ...) as defined by the Basel Committee.
Risk model
What are the risks associated with the use of inappropriate or incorrect model to measure positions or calculation of risk indicators, which ideally should allow the achievement of expected results
Possibility of loss and deterioration in monetary value of goods and services as a cause n affect of certain happenings of unforeseen or unusual circumstances or unpreventable events, is a financial risk. It arise from several factors directly associated with those events, caused due to one's own incapacity or weaknesses or other external threats, beyond one's control.
Financial risk is an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default
Financial risk arises through countless transactions of a financial nature, including sales and purchases, investments and loans, and various other business activities. It can arise as a result of legal transactions, new projects, mergers and acquisitions, debt financing, the energy component of costs, or through the activities of management, stakeholders, competitors, foreign governments, or weather.
Financial risk, market risk, and even inflation risk, can at least partially be moderated by forms of diversification.
The returns from different assets are highly unlikely to be perfectly correlated and the correlation may sometimes be negative. For instance, an increase in the price of oil will often favour a company that produces it,[6] but negatively impact the business of a firm such an airline whose variable costs are heavily based upon fuel.[7] However, share prices are driven by many factors, such as the general health of the economy which will increase the correlation and reduce the benefit of diversification. If one constructs a portfolio by including a wide variety of equities, it will tend to exhibit the same risk and return characteristics as the market as a whole, which many investors see as an attractive prospect, so that index funds have been developed that invest in equities in proportion to the weighting they have in some well known index such as the FTSE.
Risk that the changes in one or more assets that support an asset-backed security will significantly impact the value of the supported security. Risks include interest rate, term modification, and prepayment risk.
Main article: Credit risk
Credit risk, also called default risk, is the risk associated with a borrower going into default (not making payments as promised). Investor losses include lost principal and interest, decreased cash flow, and increased collection costs. An investor can also assume credit risk through direct or indirect use of leverage. For example, an investor may purchase an investment using margin. Or an investment may directly or indirectly use or rely on repo, forward commitment, or derivative instruments.
Risk of rapid and extreme changes in value due to: smaller markets; differing accounting, reporting, or auditing standards; nationalization, expropriation or confiscatory taxation; economic conflict; or political or diplomatic changes. Valuation, liquidity, and regulatory issues may also add to foreign investment risk.
Main article: Liquidity risk See also: Liquidity
This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). There are two types of liquidity risk:
Main article: Market risk
The four standard market risk factors are equity risk, interest rate risk, currency risk, and commodity risk:
Main article: Operational risk
Main article: Model risk Diversification Main article: Diversification (finance)
Financial risk, market risk, and even inflation risk, can at least partially be moderated by forms of diversification.
The returns from different assets are highly unlikely to be perfectly correlated and the correlation may sometimes be negative. For instance, an increase in the price of oil will often favour a company that produces it,[6] but negatively impact the business of a firm such an airline whose variable costs are heavily based upon fuel.[7] However, share prices are driven by many factors, such as the general health of the economy which will increase the correlation and reduce the benefit of diversification. If one constructs a portfolio by including a wide variety of equities, it will tend to exhibit the same risk and return characteristics as the market as a whole, which many investors see as an attractive prospect, so that index funds have been developed that invest in equities in proportion to the weighting they have in some well known index such as the FTSE.
However, history shows that even over substantial periods of time there is a wide range of returns that an index fund may experience; so an index fund by itself is not "fully diversified". Greater diversification can be obtained by diversifying across asset classes; for instance a portfolio of many bonds and many equities can be constructed in order to further narrow the dispersion of possible portfolio outcomes.
A key issue in diversification is the correlation between assets, the benefits increasing with lower correlation. However this is not an observable quantity, since the future return on any asset can never be known with complete certainty. This was a serious issue in the Late-2000s recession when assets that had previously had small or even negative correlations suddenly starting moving in the same direction causing severe financial stress to market participants who had believed that their diversification would protect them against any plausible market conditions, including funds that had been explicitly set up to avoid being affected in this way
Diversification has costs. Correlations must be identified and understood, and since they are not constant it may be necessary to rebalanced the portfolio which incurs transaction costs due to buying and selling assets. There is also the risk that as an investor or fund manager diversifies their ability to monitor and understand the assets may decline leading to the possibility of losses due to poor decisions or unforeseen correlations.
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The risk that a firm will be unable to meet its financial obligations
Financial risk refers to the chance a business's cash flows are not enough to pay creditors and fulfill other financial responsibilities.
Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more.
Agreed with a few answers, the Financial risk could be define as when there is a risk of loss of funds deposited or invested. In broader terms, which could be differ in case of a bank or any other company.
To ensure that Financial risk is thoroughly covered by placement of various control measures covering the other risk factors such as credit, customer, country, operational, product and market risks.
The financial risks are the risks of default or loss of investments due to mismanagement in the Company financial position. The investor may loss his investment money if the company is not able to fulfill financial obligations.
Financial risk
The probability of loss inherent in financing methods which may impair the ability to provide adequate return.
I agree with all the answers
