Financial risk management is the practice of protecting the economic value of a company by using financial instruments to manage exposure to financial risk. Application · Banking · Corporate Finance · Investment Management. In the financial world, risk management is the process of identifying, analyzing, and accepting or mitigating uncertainty in investment decisions. Basically, risk management occurs when an investor or fund manager analyzes and attempts to quantify the possible losses of an investment, such as a moral hazard, and then takes appropriate measures (or inaction) depending on the investment objectives and risk tolerance of the fund.
These potential risks can be described in a list and are generally classified according to the types of financial risk. In addition, formal models cannot capture reputational risk as one of the most serious risks to which modern companies are exposed. Since the 1990s, the tightening of legislative and regulatory requirements, as well as technological advances, have gradually increased the influence of risk managers and financial managers, especially in financial companies. A financial risk management process consists of a series of steps that are carried out to identify possible financial risks, assess their severity and identify how they can be managed.
When applied to financial risk management, this implies that company managers should not cover risks that investors can cover on their own at the same cost. In their search for excessive returns, active managers expose investors to alpha risk, that is, to the risk that the outcome of their bets will be negative rather than positive. Financial risk management is a function within organizations that aims to detect, manage and cover exposure to various risks derived from the use of financial services. In recent years, there has been a marked increase in previous studies on index-based insurance as a financial risk management tool for agricultural risks.
I am not concerned about strategic, operational, or organizational decisions related to supply chain risks, although these and financial risk management are interrelated. The effectiveness of strategies should be monitored and reported on to ensure that financial risks have been properly managed. Electronic finance has blurred the boundaries between different financial institutions, allowing the creation of new financial products and services. The tendency to formalize risk management can lead to blindness and ignorance of new, previously unknown problems.
Investment managers who follow an active strategy assume other risks to achieve higher returns than the market. Brokers use financial instruments such as options and futures, and money managers use strategies such as portfolio diversification, asset allocation and position sizing to mitigate or manage risk effectively. If unexpected economic developments cause energy stocks to fall sharply, it is likely that the manager will perform lower than the reference index, an example of alpha risk.