Last updated on August 25th, 2022 at 10:11 am
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As the field of finance grows and continues to get complex day by day, the risk involved also increases exponentially. With the increase in risk, there has been a steady demand for folks with financial risk management skills.
What is Financial Risk Management, and Why is it Important?
Financial risk management is simply a process that entails identifying the risks and the end goal is to reduce or mitigate the risk to the maximum extent possible. It is done by making investment decisions bearing in mind the financial troubles the business is under. With these investments, a finance professional seeks to hedge against the risk which was identified at an earlier stage.
It is essential to manage financial risks simply because they exist and can prove detrimental to the growth and survival of any entity if the situation takes an unfavorable turn. Hence, failure to adequately manage these risks can cause harm to the entity at large, and thus there is an increased demand for people with the required skills for mitigating financial risks.
Types of Financial Risks
Financial risks exist of multiple types and sorts depending upon their nature. Following are some main buckets they are typically classified into.
Market Risk
Since financial securities are tradeable, they have a value that isn’t fixed but rather fluctuates based on demand and supply. This volatility or price change can work both ways for any entity. Hence it poses a substantial risk depending upon the exposure. As a finance manager, it is the task to mitigate those risks, usually by hedging against the current exposure.
Hedging involves taking positions against the pre-existing ones in case the trade goes. Otherwise, a finance manager can recover some of it via the hedged position. Market risk is common for companies involved in international business and transacting in foreign exchange. These entities are at constant risk of change in the value of FX. A successful finance manager will hedge these risks accordingly.
Credit Risk
Most businesses involve some or the other form of credit. Especially with financial institutions where the company is based on lending activities, it becomes the principal risk. To put it simply, credit risk is the risk of the borrower not being able to repay the amount, which is called serving the obligation in the banking industry. Depending upon the borrower's profile and the credit deal's characteristics, you must assess these risks. Once assessed, they can also be hedged for via financial securities like Credit Default Swap (CDS).
Liquidity Risk
Liquidity means the ability to convert an asset into cash. Cash balances and bank accounts are considered to be the most liquid assets simply because of their readiness in terms of usage. However, liquidity can be a problem with certain assets, especially fixed ones. At times assets of higher value do not get sold readily as there might be a gap in demand and supply, in the absence of buyers, an asset cannot be converted into cash and hence causes an inability to transact. A finance manager takes into account the liquidity risk and tries to maintain a balance of liquid assets such that it does not impact the overall operations of an entity.
How Can Our Financial Services And Capital Markets Help?
The course for the advanced management program in financial services and capital markets, provided by Imarticus learning and certified by IIM Lucknow, is a 6 months course of 126 hours with curated modules focusing on different aspects of financial services. The program covers financial risk and compliance and includes modules on investment banking and capital markets. A part of the course is carried out in person at the prestigious campus of IIM Lucknow! Where you can visit the campus and get to meet your peers as well as faculty while you learn live from them.
The course offers an immense opportunity to network among peers with similar interests and finance-related work experience. Such networking will allow you to create a holistic and global perspective as you interact with people from diverse backgrounds in financial services. This course offers perfect financial risk management training for financial enthusiasts looking to upskill themselves.
Conclusion
Financial risk is imminent and will exist as long as finance exists. Even when there are multiple types of financial risks involved, a finance manager's job is to mitigate them as much as possible. With Imarticus learning, you can level up your financial risk management skills and get a certificate from IIM Lucknow!
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