Financial Risk

PRESENTATION ON TOPIC:

FINANCIAL RISK

submitted to-

PRESENTED BY-

Prof. Ritupurna Das RUCHIKA SINGH(605)

NLU Jodhpur TEK CHAND MEENA(614)

& VIVEK KUMAR MISHRA(616)

LL.M 2014-15

Banking & Finance

1 PRESENTED BY- RUCHIKA SINGH, TEK CHAND MEENA & VIVEK KUMAR MISHRA

Risk can be referred as the chances of having an unexpected or negative outcome. Any action or activity that leads to loss of any type can be termed as risk. Financial risk refers to the probability of loss in

financing methods which impair the chance to provide adequate return or in simple words it can be said that any possibility of the default of bond issuer by failing to repay principal and interest in timely manner.

Meaning Meaning


It can also be said that it arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates etc. Financial risk term is associated with the

securities related to the corporate and the government in its wide sense

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Objectivity- it means it does not change as peoples will, it is objective existence. It cant be eliminated. Comprehensive- it passes through the entire

process of financial management activities. Financial risk is consisted in every chain of financial activities.

Characteristics of Financial Risk Characteristics of

Financial Risk


Uncertainty- it is reflected in occurrence of financial risk, the uncertainty of occurrence time of financial risk and the uncertainty of the result of financial risk. Predictability- it has feature of uncertainty but

if some cautions are followed then there are some chances of predictions regarding the risk.

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Developmental- it has this special feature that with rapid development of market economy, FR is created and developed. High-tech development and application make the development of financial risk more complicated.

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Economic factor-Weakness in the economy, specific markets, industries or demographic groups can cause sudden drops in demand for particular goods or services, leaving small businesses with less money than they had anticipated. Legal factor-Changes in tax laws and industry

regulations can lead to the financial risk. New laws can even push companies out of business entirely, such as when popular pharmaceuticals or food products are banned by a government authority.

Causes behind the Financial Risk Causes behind the

Financial Risk


Market Risk- it is possibility of loss to bank caused by the changes in market variables. This type of risk arises due to movement in prices of financial instrument. Market risk can be classified as Directional Risk and Non - Directional Risk. Directional risk is caused due to movement in stock price, interest rates and more. Non- Directional risk on the other hand can be volatility risks.

Types of Financial Risk Types of

Financial Risk


Credit Risk- This type of risk arises when one fails to fulfill their obligations towards their counter parties. when a bank borrower/counter party fails to meet the obligations on agreed terms. Credit risk can be classified into Sovereign Risk and Settlement Risk. Sovereign risk usually arises due to difficult foreign exchange policies. Settlement risk on the other hand arises when one party makes the payment while the other party fails to fulfill the obligations.

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Liquidity Risk- This type of risk arises out of inability to execute transactions. Liquidity risk can be classified into Asset Liquidity Risk and Funding Liquidity Risk. Asset Liquidity risk arises either due to insufficient buyers or insufficient sellers against sell orders and buy orders respectively.

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Operational Risk- This type of risk arises out of operational failures such as mismanagement or technical failures. Operational risk can be classified into Fraud Risk and Model Risk. Fraud risk arises due to lack of controls and Model risk arises due to incorrect model application.

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Establishing goals and context Identifying risks Analyzing the identified risks Treating or managing the risks Monitoring and reviewing the risks and the risk

environment regularly Continuously communicating, consulting with

stakeholders and reporting.

Management of Financial Risk Management of

Financial Risk


Framework of Risk Management Independent Market Risk Management Independent Credit Risk Management In-House Expertise and Resources Risk Reduction Techniques Valuations and Exposures Liquidity, Funding Arrangements and Financial

Performance

Controlling the Financial Risk Controlling the

Financial Risk


Transparency Proactive customers Less chance of getting loss Maximum chances of retaining profit Retaining the trust of customers Formulation of policies regarding the financial

management.

Importance of Financial Risk Management

Importance of Financial Risk Management


Financial Risk

Documents

Transcript of Financial Risk