By:Mohit Mehra(97-MBA-10)

Financial Risk is the risk arising from the changes in

the values of measurable financial variables. or

When the company will not have adequate cash flow

to meet financial obligations, then the risk is called Financial Risk.

 Financial Risk is the additional risk a shareholder

bears when a company has debt in addition to equity financing i.e. Companies that issues more debt instruments would have higher financial risk in comparison to the companies financed mostly or entirely by equity.

Sources of Financial Risk

Risk arising from organizations exposure to changes in

market prices like interest rates, commodity prices etc.

Risk arising from actions of, and transactions with,

other organizations such as customers and counter parties in derivative transactions.

Risk arising from internal actions or failures of the

organizations particularly people, processes and systems.

Classification of Financial Risk

Credit Risk
Market Risk Operational Risk

Other Risk

Credit Risk
Credit Risk is the risk that a customer, counter party or supplier will fail to meet its obligations It includes everything from a borrower default to suppliers missing deadlines because of credit problems. Credit Risk is also known as the default risk or counter party risk. Credit Risk is assessed by the independent agencies in the form of credit rating.

Market Risk
Market Risk is the change in the value of assets due to

changes in the underlying economic factors such as interest rates, foreign exchange rates, stock prices and commodity prices. All economic entities that own assets face financial risk. For example- Bills receivables of software exporters that are traded in foreign currencies are exposed to exchange rate fluctuations while value of govt. securities are exposed to interest rates.

Operational Risk
Operational Risk is the risk that people, processes or

systems will fail or that an external event will negatively affect the company. For a BANK, operational risk can be defined as the possibility of loss due to mistakes made in carrying out transactions such as settlement failures, failures to meet regulatory requirements and ultimate collections.

Other Risk
Other risks include:i. Business Risk ii. Organizational Risk

Business Risk is the risk that future operating results may not meet expectations Organizational Risk is the risk that arises from a badly designed structure or lack of sufficient human resource

Financial Risk Management Process

1.
2. 3.

4.
5.

Defining objectives Identifying the risk exposures Evaluating risk exposures Analysing solutions Implementation and Review

Defining objectives
Drawing a structure of operating environment,

overview of the organization mission, objectives, stakeholders interest and then defining the objectives for which risk is to be assessed.

Identifying the Risk Exposure

Documenting the conditions and events that

represents material threats to the organizations achievement of its objectives.

Evaluating the Risk Exposure

Evaluating the risk through risk assessment

techniques such as probability distribution

Analysing Solutions
Aggregating all the risk and expressing results in terms

of impact on organizations key performance indicators, prioritising risk and developing the solutions to minimize that risks.

Implementation and Review

Implementing the solutions and continuous appraisal

of the performance of risk management strategies.