Financial Risk Management

16 Jan

“The greatest risk in life is not taking any risks,” said Robin Sharma, the renowned author of the best-seller, The Monk Who Sold His Ferrari. Risk is omnipresent in life as well as in business, but the prudence is in minimising risks and maximising returns. Risks can be of several kinds, but financial risk is one of the most important that directly impacts the survival and growth of businesses.  

Risk has two ingredients: (1) the probability of occurrence of an unfavourable event, and (2) the consequences and impact if that unfavourable event occurs. Risk management is a process of learning from experience and neutralising risks. Financial Risk Management is important for financial institutions, government enterprises, and companies. The three important aspects of financial risk are market risk, operational risk, and credit risk. Risk management is not a one-time exercise, but an ongoing one. Continuous review and correction of risks are essential for success. A good risk management system can enhance quality and leverage the returns of your business. 

Due planning must go into the management of financial risk in the strategic business plan. A sound knowledge of finance and its impact on business is necessary to assess the financial repercussions of various risks on the long-term growth of the business. Many companies now consider risk management as a part and parcel of their business. An integrated strategy that focusses on all areas of risk management can enhance shareholder value. 

When a financial derivative instrument is used directly or indirectly to minimise or avoid a financial risk arising in an organisation, the process is known as ‘hedging.’ Financial derivatives such as Futures, Options, Forwards, and Swaps provide ways of hedging the risk. Hedging is a fundamental tool of financial risk management. The automation of risk management processes have also evolved and improved over the years. Various systems and software can be applied across a portfolio of risks in treasury, market, and credit risk areas. 

© 2007. P. Mohan Chandran. All Rights Reserved

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