The identification and management of financial risks

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The identification and management of financial risks

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Abstract

Financial risk exposure to adverse events that erode the profitability of the company and may in, extreme circumstances,lead to the collapse of the case. They may be doubtful, unfavorable changes in exchange rates, dependence on one supplier, the loss of a major customer, the loss of foreign investment and hedging decisions poor. They may be bad investment decisions on plant, machinery and buildings.

Areas of Study Financial Risk: This set the framework around which the financial risk can be treated. To make it necessary to identify the different sources of financial risk. This may include:
• liquidity risk
• credit risk
• the risk of interest rate
• currency risk
• risk financing
• risks arising from financial derivatives

Tags : Financial risk , exchange rates, financial derivatives

Introduction to the Concept of Financial Risk
1. Definition of financial risk
2. Areas of Financial Risk
3. The Benefits of Financial Risk Management
4. The implementation of financial risk management
The process of Financial Risk Management
The types of financial risk
Financial Risk Management

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[...] · Conducting a sound evaluation of planned investment, using proven techniques. II-The process of Financial Risk Management Financial risk is defined as the ability to foresee problems that could arise which will prevent the achievement of financial goals and make attaining financial objectives more difficult. Therefore, the financial risk management should be firmly put in place to identify, measure, control or minimize risk to a level consistent with the "risk appetite" for the business or its ability to absorb the risk, to master or accept the consequences. [...]

[...] · Currency risk: the risk that the operator may suffer by carrying out import and export operations as a result of adverse movements in exchange rates. There are two types of currency risk: ‘Accountancy' currency risk resulting from the need to translate the results of a subsidiary of a multinational into origin currency. "Financial" Currency Risk resulting from future resources of a company. · Interest rate risk: Interest is the compensation of the lender, it is paid periodically at a fixed date. Lenders require a positive nominal interest rate to compensate for inflation and loss of use of their capital. [...]

[...] · Diversification: according to this technique, an investor can reduce the risk of his portfolio by holding assets that are not or poorly correlated positively, therefore, specifically, by diversifying his investments. This provides the same expected return by reducing portfolio volatility. · Insurance: is an action that allows the company to mitigate the financial risk and especially that of credit. · The use of derivatives: This is mainly to cover against exchange risk, it is called: Swap: swap is a financial flow between two players. Two contracts are the best known: the interest rate swaps and foreign exchange swap. [...]

[...] Options: This is a derivative that gives the right but not the obligation to either buy or sell an asset at a price set in advance. The issues to be discussed • What correlation exists between the management of financial risk and the value of the company? • What type of risk management has to be adopted during periods of financial crisis? • What is the role of human capital in the process of financial risk management? [...]

[...] This can include: · liquidity risk · credit risk · risk of interest rate · currency risk · funding risk · risks arising from derivative instruments 3 - The Benefits of Financial Risk Management Financial Risk Management offers many advantages for the company because it: · Improves planning and financial management that lie at the heart of the corporate governance · Facilitates making more robust investment decisions · Informed decisions on hedging · Encourages the development of the constant supervision of markets and the economy. · Encourages the practice of due diligence in outsourcing and collaboration with the counterparties - The implementation of financial risk management The development of a robust system of financial risk management will depend on a number of factors such as: · The development of robust financial systems and internal controls. · The development of reporting tools lucid and concise. · Preparing a cash budget plan, to reduce the likelihood of liquidity risk. [...]

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