Risk management is a structured approach to managing the uncertainty related to a threat, through a sequence of human activities including the risk management, developing strategies to manage and mitigate risk using managerial resources. The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effects of risk and accept some or all of the consequences of a particular risk.
Sometimes, risk management focuses on containing risk by natural or legal reasons (eg natural disasters or fires, accidents, death or claims). Moreover, financial risk management focuses on risks that can be managed using financial and commercial instruments.
The objective of risk management is to reduce different risks relating to a preset level to a socially acceptable level. It may refer to numerous types of threats caused by environment, technology, humans, organizations and politics. On the other hand, it involves all the resources available for humans or, in particular, a risk management entity (person, staff, organization).
Thus, enterprise risk management is a process performed by the board of an organization, the management and staff of this organization. It is applied in establishing strategies across the enterprise, designed to identify potential events that may affect the entity and manage risk to provide reasonable security and integrity regarding the achievement of objectives.
Financial risk management has taken on a special importance internationally, due in part to the financial crisis of the nineties. Financial risk management deals with various types of financial risks.
TYPES OF RISK
Market Risk and Credit Risk are the two main types of risk.Here is an explanation of each of these with their further classification:
Market Risk: The fluctuations in the financial markets. They have three more types.
- Currency Risk: It results from the volatility of the currency market.
- Interest Rate Risk: It results from the volatility of the interest rates.
- Dragon Market Risk: It refers specifically to the volatility of the markets in financial instruments such as equities, debt, derivatives, etc.
Credit Risk: It results from the possibility that one party to a financial contract does not take its obligations. It is further categorized into three types:
- Liquidity Risk or funding: It refers to the fact that one party to a financial contract is unable to obtain the necessary liquidity to meet its obligations despite dispose of assets which cannot be sold quickly enough and to adequate- price and the will to do so.
- Operational Risk: It is used to regulate the banking sector in Europe as the “risk of losses resulting from inadequate or failed internal processes, people and internal systems or due to external events “
- Quantitative Risk Magnitude-VaR: All types of risks discussed in the previous sections have been taken into account by the entities participating in the market and demonstrate the need for tools to determine quantitatively (in monetary units) the risk assumed by integrating a new asset to the portfolio. Thus arises the VaR (Value at Risk) that provides a quantitative and objective measure of value at risk of a portfolio to normal (common) market.
Financial risk management is the systemized approach through which one can manage or overseas the factors or uncertainty regarding the financial areas of a business. The strategies which are followed in order to reduce the risk level toward towards the financial areas of a business include lower down the intensity of negative effects, conversion of risk from one party to another party and many other. In our financial services risk management, the professionals who have done their specialization in risk management can help the one in mitigating his financial risk.