{"id":12173,"date":"2023-01-10T17:10:00","date_gmt":"2023-01-10T17:10:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=12173"},"modified":"2023-05-05T15:49:30","modified_gmt":"2023-05-05T15:49:30","slug":"financial-risk-management-all-you-need-to-know-practical-examples","status":"publish","type":"post","link":"https:\/\/businessyield.com\/bs-business\/financial-risk-management-all-you-need-to-know-practical-examples\/","title":{"rendered":"Financial Risk Management: All you need to know (+Practical Examples)","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

What is Financial Risk Management?<\/span><\/h2>\n\n\n\n

Financial Risk Management is the exercise of analyzing potential risks ahead, its identification, and the provision of solutions to curb the risks. In making business plans, the ability to manage the risks soundly determines the level of profit and losses involved in the establishment.<\/p>\n\n\n\n

Read More: Financial Intelligence<\/a><\/p>\n\n\n\n

Importance of Financial Risk Management.<\/span><\/h2>\n\n\n\n

It is no doubt that the sustainability of investments or financial resources depends on the risk management factor. Financial Risk Management aids you to monitor, point out, and take charge of your capital, savings, and income. In doing this, one avoids business breakdown. Financial emergencies, management errors, legal liabilities, accidents, and natural disaster leads to financial risks, but when properly managed brings a sure guide to the organization or individual during the hard times. Financial Risk management is very prominent for an establishment to be successful. It also majors in reducing losses and escalating returns.<\/p>\n\n\n\n

Types of Financial Risk Management.<\/span><\/h2>\n\n\n\n

Comparatively, there are different types of risks that an organization can face and the division is in three main branches. That includes:<\/p>\n\n\n\n

#1. Enterprise Risk: <\/span><\/h3>\n\n\n\n

These are risks by businesses to increase profits and uphold quality shareholding values. For instance, some companies diversify their products into sizes or different packs to gain sales and new investors.<\/p>\n\n\n\n

#2. Non-Business risks: <\/span><\/h3>\n\n\n\n

It Arises from a lack of control by the firm. That is, they arise from general economic imbalance or government policies.<\/p>\n\n\n\n

#3. Monetary Risks: <\/span><\/h3>\n\n\n\n

This is connected with the losses of the organization, insufficient sales, a drop in interest rates, currencies, and loss of shareholders.<\/p>\n\n\n\n

Other types of Financial Risk Management are:<\/span><\/h3>\n\n\n\n

#a. Market Risk:<\/span><\/h3>\n\n\n\n

This type of risk arises due to the movement in the prices of financial instruments. Market risk can be classified as Directional Risk and Non-Directional Risk. Movement in stock price, interest rates, and more leads to Directional risk. Non-Directional risk, on the other hand, can be volatility risks.<\/p>\n\n\n\n

#b. Credit Risk:<\/span><\/h3>\n\n\n\n

This type of risk arises when one fails to fulfill their obligations towards their counterparties. Credit risk can be classified into Sovereign Risk and Settlement Risk. Sovereign risk usually arises due to difficult foreign exchange policies. Settlement risk, on the other hand, arises when one party makes the payment while the other party fails to fulfill the obligations.<\/p>\n\n\n\n

#c. Liquidity Risk:<\/span><\/h3>\n\n\n\n

This type of risk arises out of an inability to execute transactions. Liquidity risk can be classified into Asset Liquidity Risk and Funding Liquidity Risk. Asset Liquidity risk arises either due to insufficient buyers or insufficient sellers against sell orders and buys orders respectively.<\/p>\n\n\n\n

#d. Operational Risk:<\/span><\/h3>\n\n\n\n

This type of risk arises out of operational failures such as mismanagement or technical failures. Nevertheless, Operational risk can be classified into Fraud Risk and Model Risk. Fraud risk arises due to the lack of controls and Model risk arises due to incorrect model application.<\/p>\n\n\n\n