Financial risk management involves identifying risks an organization faces, assessing and quantifying those risks, defining strategies to manage them, implementing risk management strategies, and monitoring their effectiveness. Financial risks can arise from market exposures, transactions with other organizations, and internal failures. Key types of financial risk include market, credit, liquidity, and operational risk. Organizations manage financial risk through various strategies and products, often involving derivatives whose values are based on underlying assets.

1. FINANCIAL RISK
MANAGEMENT
BERNARDINO M. PIMENTEL
Advance Corporate Finance, 2nd Trimester, 2023-2024

2. Risk provides the basis for
opportunity.
Risk refers to the probability of loss,
while Exposure refers to the
possibility of loss. Hence, risk arises as
a result of exposure.
When an organization has financial
market exposure, there is a possibility
of loss but also an opportunity for
gain or profit.
Risk is the likelihood of losses resulting
from events such as changes in
WHAT IS RISK?

3. 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.
When financial prices change dramatically, it can increase costs,
reduce revenues, or otherwise adversely impact the profitability of an
organization
HOW DOES FINANCIAL RISK ARISE?

4. Financial risks arising from an organization’s exposure to changes in
market prices, such as interest rates, exchange rates, and commodity
prices
1.
Financial risks arising from the actions of, and transactions with,
other organizations such as vendors, customers, and counterparties
in derivatives transactions
2.
Financial risks resulting from internal actions or failures of the
organization, particularly people, processes, and systems
3.
3 MAIN SOURCES OF
FINANCIAL RISK

5. Risk can be referred to like the chances
of having an unexpected or negative
outcome. Any action or activity that
leads to loss of any type can be termed
as risk. There are different types of risks
that a firm might face and needs to
overcome
TYPES OF RISK:

6. 1. Business Risk
These types of risks are
taken by business
enterprises themselves in
order to maximize
shareholder value and
profits. As for example,
companies undertake high-
cost risks in marketing to
launch a new product in
order to gain higher sales.
TYPES OF RISK:

7. 2. Non- Business Risk
These types of risks are not under the
control of firms.
Risks that arise out of political and
economic imbalances can be termed as
non-business risk.
TYPES OF RISK:

8. 3. Financial Risk
Financial Risk as the term
suggests is the risk that
involves financial loss to
firms. Financial risk
generally arises due to
instability and losses in the
financial market caused by
movements in stock prices,
currencies, interest rates
and more.
TYPES OF RISK:

9. Financial risk refers to the likelihood of losing money on a business or
investment decision. Risks associated with finances can result in
capital losses for individuals and businesses. There are several
financial risks, such as credit, liquidity, and operational risks.
WHAT IS FINANCIAL RISK?

10. In other words, financial risk is a danger
that can translate into the loss of capital.
It relates to the odds of money loss.
In case of a financial risk, there is a
possibility that a company’s cash flow
might prove insufficient to satisfy its
obligations.
In government sectors, financial risk
implies the inability to control monetary
policy and or other debt issues

11. Individuals face financial risks in many
aspects of their lives:
Employment/Income Risk
Expense Risk
Asset/Investment Risk
Credit/Debt Risk
For corporations, there are additional/
alternative types of risks faced, such as:
Market Risk
Credit Risk
Liquidity Risk
Operational Risk

12. Financial risk is one of the high-priority risk
types for every business. Financial risk is
caused due to market movements and market
movements can include a host of factors.
TYPES OF FINANCIAL RISK

14. TYPES OF FINANCIAL RISK:
1.Market Risk
This type of risk arises due to the
movement in prices of financial
instrument. Market risk can be classified
as Directional Risk and Non-Directional
Risk. Directional risk is caused due to
movement in stock price, interest rates
and more. Non-Directional risk, on the
other hand, can be volatility risks.

15. TYPES OF FINANCIAL RISK:
2.Credit Risk
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.

16. TYPES OF FINANCIAL RISK:
3.Liquidity Risk
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.

17. TYPES OF FINANCIAL RISK:
4.Operational Risk
This type of risk arises out of operational
failures such as mismanagement or
technical failures. 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.

18. Financial risk management is a process to deal with the uncertainties
resulting from financial markets.
It involves assessing the financial risks facing an organization and
developing management strategies consistent with internal priorities
and policies.
Managing financial risk necessitates making organizational decisions
about risks that are acceptable versus those that are not.
Organizations manage financial risk using a variety of strategies and
products. It is important to understand how these products and
strategies work to reduce risk within the context of the organization’s
risk tolerance and objectives.
WHAT IS FINANCIAL
RISK MANAGEMENT?

19. Strategies for risk management often involve
derivatives. Derivatives are traded widely
among financial institutions and on
organized exchanges.
The value of derivatives contracts, such as
futures, forwards, options, and swaps, is
derived from the price of the underlying
asset.
Derivatives trade on interest rates, exchange
rates, commodities, equity and fixed income
securities, credit, and even weather.
WHAT IS FINANCIAL
RISK MANAGEMENT

20. FINANCIAL RISK
MANAGEMENT PROCESS
Identifying the risk
1.
Assessing and quantifying the risk
2.
Defining strategies to manage the risk
3.
Implementing a strategy to manage the risk
4.
Monitoring the effectiveness of the strategy
in managing the risk
5.

21. IN SUMMARY... Financial risk management is not a
contemporary issue. Financial risk management
has been a challenge for as long as there have
been markets and price fluctuations.
Financial risks arise from an organization’s
exposure to financial markets, its transactions
with others, and its reliance on processes,
systems, and people.
To understand financial risks, it is useful to
consider the factors that affect financial prices
and rates, including interest rates, exchange
rates, and commodities prices.
Since financial decisions are made by humans,
a little financial history is useful in understanding
the nature of financial risk.

22. FIN.
THANK YOU!