Financial Risk Issue
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A Financial Risk Issue is a organizational risk that affects a financial plan.
- Context:
- It can (typically) involve uncertainty in financial returns, where the potential for loss impacts investment strategies.
- It can (often) stem from market fluctuations, interest rate changes, or economic downturns.
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- It can range from being a Minor Financial Risk Issue to being a Major Financial Risk Issue.
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- It can include risks related to Currency Exchange, where changes in foreign exchange rates affect the value of international investments.
- It can arise from Credit Risk, where the possibility of a borrower defaulting on a loan impacts financial stability.
- It can involve Liquidity Risk, where assets cannot be quickly converted into cash without a significant loss in value.
- It can be associated with Interest Rate Risk, where changes in interest rates impact the cost of borrowing and the returns on savings.
- It can occur due to Inflation Risk, where rising prices erode the purchasing power of money, affecting long-term financial goals.
- It can include Market Risk, where financial markets' overall performance affects investments' value.
- It can be managed through Financial Risk Management strategies such as diversification, hedging, and insurance.
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- Example(s):
- Financial Foreign Exchange Risk: The financial risk that changes in currency exchange rates will negatively affect the value of international investments or transactions.
- Financial Shape Risk: The financial risk arising from changes in the yield curve that can impact the value of interest rate-sensitive assets.
- Financial Volatility Risk: The financial risk that the value of an asset will fluctuate due to changes in market volatility, affecting investment returns.
- Financial Sector Risk: The financial risk that an entire sector of the market will underperform, impacting investments concentrated in that sector.
- Financial Liquidity Risk: The financial risk that an asset cannot be sold quickly enough in the market without significant price concessions.
- Financial Inflation Risk: The financial risk that inflation will erode the real value of returns on investments, particularly affecting long-term financial goals.
- Financial Credit Risk in a scenario where a lender faces the potential of a borrower defaulting on a loan: This financial risk can lead to significant losses if the borrower fails to meet their debt obligations.
- Financial Interest Rate Risk affecting a company's debt repayments when interest rates increase unexpectedly: This financial risk can increase the cost of borrowing and impact profitability.
- Financial Market Risk impacting an investment portfolio during a stock market downturn: This financial risk can lead to significant losses in the value of investments due to broad market declines.
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- Counter-Example(s):
- See: Financial Risk Modeling, Financial Risk Management, Financial Transaction, Default (Finance), Downside Risk.
References
2016
- (Wikipedia, 2016) ⇒ http://wikipedia.org/wiki/financial_risk Retrieved:2016-4-29.
- Financial risk is an umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. Risk is a term often used to imply downside risk, meaning the uncertainty of a return and the potential for financial loss. A science has evolved around managing market and financial risk under the general title of modern portfolio theory initiated by Dr. Harry Markowitz in 1952 with his article, "Portfolio Selection". In modern portfolio theory, the variance (or standard deviation) of a portfolio is used as the definition of risk.
2016
- (Wikipedia, 2016) ⇒ http://wikipedia.org/wiki/financial_risk_management Retrieved:2016-4-29.
- Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange risk, Shape risk, Volatility risk, Sector risk, Liquidity risk, Inflation risk, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.