Financial Risk Management Homework Help

Risk is the probability of deviation from an expected outcome. Risk refers to the anticipation of loss, while exposure is the possibility of loss, although they are interchangeable. Risk arises as a result of exposure. When an organization has an exposure to the financial market, there is a possibility of loss but also an opportunity for gain or profit. In the Financial market, the strategic or competitive benefits occur as a result of exposure. Risk is the probability of losses resulting from various events like changes in market prices.

Financial risk arises through a number of transactions of financial activities, which includes purchase and sales, loans and investments, and various other business activities. As the financial prices changes, it increase costs, reduces revenues, or adversely impact the profitability of the organization. Fluctuations in price makes it more difficult to plan and budget, price goods and services, and allocate the capital.

The main sources of financial risk are as follows:

• Firstly, the risk arising from the organization’s exposure to changes in the interest rates exchange rates and commodity prices.
• Secondly, the risk arising from the actions and transactions performed with other organizations such as customers, vendors and counter parties in derivative transactions.
• Thirdly, the risk resulting from some internal activities or failures of the organization, by people, processes and systems.

Financial risk management is a process of monitoring financial risks and managing their impact. Financial risk management is a practical application of modern finance theories, models and methods. It is a process which deals with the uncertainties resulting from financial market. It involves assessing the financial risks facing an organization and developing strategies consistent with internal company policies.

Financial risk management can be qualitative and quantitative. It focuses on when and how to hedge using financial instruments to manage costly exposures to risk. Organizations manage financial risk using a variety of strategies and products.