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What is financial risk?

There are three main sources of financial risks. To deal with all we need a good Financial risk management skill.
The sources are:
1 financial risk is arising from exposure to changes in the organization of the market prices such as exchange rates, commodity prices and interest rates.
2 Financial risks are arising from activities and transactions with other organizations such as suppliers, customers and counter parties to derivatives transactions.
3 The financial risks arising from acts or omissions of the internal organization, and especially to the people, systems and processes. These are detailed in subsequent chapters. 


Now, what is financial risk management? 

Financial risk management is the process of dealing with the uncertainty arising from the financial markets. This includes assessing the financial risks which is facing the organization and development of management techniques in line with the priorities and internal policies. Financial Risk Solutions can provide proactive organization with a competitive advantage. It also ensures that management, shareholders, operational staff and the Board in an agreement on the key issues of risk. Financial risk management requires organizational decisions about the risks that are acceptable in comparison with those who are not. 

Diversification:
In portfolio management, as well as individual components of the portfolio provides opportunities for diversification, within the limits. Diversified portfolio of assets, incomes are different, in other words, negative or weak correlation between them. It is useful to think that exposure to the organization as a portfolio and consider the impact of changes or additions to the potential risks of the total. Diversification is an important tool for managing financial risks. The diversification amongst counter-parties may trim down the risk that unexpected events negatively impact the organization by default. Diversification amongst investment assets reduces the size of the loss if an issuer. The diversification of customers, financial resources and suppliers, reduces the possibility that the organization will be negatively affected by their activities beyond the control of management changes. Although the risk of loss still exists, can reduce the opportunities for diversification for major side effects. 

Comments

Lena said…
I think it absolutely makes sense in any case to diversify and mix up your portfolio. For some of us like me who are keen on making quick returns I would throw in some small caps and penny shares too. Although these are high risk options but in a nicely balanced portfolio they can give good returns.
July 13, 2011 at 3:24 AM
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