Financial Risk Management

Financial Risk Management creates and protects economic resources. Financial Risk Management uses financial instruments to determine areas of risk (and opportunity) within the credit risk and market risk sectors of business, relates these exposures (and opportunities) to the objectives of the organization and develops strategies to protect economic resources.

Financial risk management is similar to risk management generally in that it identifies and measures risk and develops a strategy for addressing those risks. Financial risk managememt relies heavily on technologies that perform credit analysis and Value at Risk (VaR) measurements.

Financial Risk Management and Credit Risk

Credit risk faced by lenders is most often managed by first evaluating the risk potential of each client. A typical approach is to set limits on so called revolving products, such as credit cards. For mortgages and other types of loans, higher pricing and loan security requirements are part of the strategy.

Businesses that carry accounts receivable are exposed to credit risk from clients who can not or do not meet the payment requirements of an agreement. One response to this type of credit risk exposure has been to create an in house credit risk managment department to evaluate clients and potential clients and to advise on methods or avoiding, reducing and transferring credit risk.

Financial Risk Management and Market Risk

Market risk management, as a function of financial risk managment, is focused on the four market risk factors that can cause the value of an investment to decrease. Each of those factors is, therefore, an exposure to risk.

Investment porfolios are exposed to equity risk, which is the risk that prices of stocks will change and impact the organization's equity. Businesses whose assets are tied to the interest rate, of course, face the risk that interest rates will change. International business must manage currency risk - the risk that foreign exchange rates will change. And, many businesses face commodity risk, which is the risk that commodity prices will change.

Exposure to market risk is generally evaluated using Value at Risk (VaR) methods. Treatments for exposure to market risk, in a financial risk managment strategy, are as varied as the resources at risk and the managers of risk responsible for their care. Managers may choose to change the balance between assets and liabilities to achieve an acceptable level of risk exposure. Derivatives such as options, futures or swaps are often employed to reduce overall exposure to risk.

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Additional Financial Risk Management Resources

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• Principles of Risk Management
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• Risk Management Insurance
• Risk Management Planning
• Risk Management Product
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• Risk Management Solutions
• Risk Management Strategy
• Risk Management Training

Our Experienced Financial Risk Mangement Consultants can help you maintain economic value and develop opportunity preparedness..