he process of developing economic value of a firm is known as financial risk management. This type of risk management is done through several processes with the help of various financial instruments. Another reason behind financial risk management is to cover risks related to credit and market fluctuation.
At the same time, there are several other risk factors that are managed through financial risk management like risk factors related to the process of foreign exchange, inflation and so on.Any kind of successful risk management depends on a number of factors. The prime factor is to identify the risk at proper time.
If the risk can be predicted at right time, it can be hedged. To predict any kind of risk, experience about the field is necessary. Another important factor is to identify the particular instrument through which the risk factors can be managed properly.
There are a number of financial instruments that are available for the purpose of financial risk management but each type of financial risk needs a specific financial instrument. Because of this, proper planning and execution of that plan at right time are also very important for financial risk management.
Financial risk management is concerned about proper timing and selection of appropriate instrument to cover or manage different types of financial risks.
Different types of market risks that are managed through financial risk management are the equity risk, equity index risk, commodity risk and interest rate risks. All these risks are related to the fluctuations in the market conditions. On the other hand, the credit risk denotes those risks that are caused by non-payment of loans or non-payment of several other credit products by the borrower. These risks are also covered by financial risk management.
According to financial economics, financial risk management is not meant to manage those risks that can be handled by the investors on their own at the same or at a lower cost than what the risk management firm would have to spend. Perfect markets never provide the fund managers any chance to develop the economic value of business. But at the same time, the financial markets cannot remain perfect throughout and there are enough chances to use the financial risk management tools and develop the desired economic value for the firm.
Last Updated on : 1st July 2013