What Is Financial Risk And Its Types
All the risks that can occur in Finance refer to financial risks. For every business person, the fear of such risk is always at peak. Hence, Financial Risk Manager is gaining much popularity in this regard. It can provide tactics to mitigate financial risks. But, before mitigation, we have to know what the types of financial risk are. So let’s start and have a look at some risks.
Main Categories of Risks
Risks are unexpected outcomes which can be categorized into three main categories:
- Business Risks
- Non-Business Risks
- Financial Risks
Business Risks are those risks that are taken by corporates to enhance their sales. For instance: A company is investing higher costs just hoping to get back high profit. This is indeed a risk as all investment can drop too.
Some risks are non- business. These are not under the control of the company. However, external factors enhance such risks.
Financial risks refer to risks and decline in finance. This may arise due to a number of factors such as:
- Fluctuation in the stock market
- The downfall of currency
- Interest charges
Subdivisions of Financial Risk
Now, let us take a deep look inside financial risks. Financial risk is further subdivided into:
- Market Risk
The risk arising due to fluctuation in prices is called as market risk. This fluctuation can be in financial instruments. It is further broken down into:
- Directional risk (caused due to the fluctuating stock market).
- Non-Directional risk (such as volatility risks).
- Credit Risk
It happens when a borrower fails to make payment. It also has further two categories:
- Sovereign risks
- Settlement risks
Complex foreign exchange policies give birth to sovereign risks. While settlement risk arises only when one company pays off and the second company fails to pay.
- Liquidity Risk
When certain commodities can’t be traded efficiently to market and it does not even affect the market price. Such risk is called liquidity risk. It is further divided into:
- Asset Liquidity Risk
- Funding Liquidity Risk
- Operational Risks
Operational failure and mismanagement can lead to operational risks. Get quotes here https://www.medisupps.com/medicare-supplement-plans-2019/ for 2019 supplement plans
This misleading can lead to:
- Fraud Risk
- Model Risk
- Legal Risks
Lawsuits can cause legal risks. Any loss due to legal processes falls under legal risk.
Identify such risks and try to mitigate them for a better financial position.