Financial Risk as the term suggests is the risk that involves financial loss to firms. Financial risk generally arises due to instability and losses in the financial market caused by movements in stock prices, currencies, interest rates and more. quicker maturation. Loans advanced for cyclical industries, such as construction, are designed Effective management is an important element of business it determines how well capital will be used to produce profit. Your lender will be looking for a strong managerial presence.
Types of Financial Risks
1. Market risk: This type of risk arises due to movement in prices of financial instrument. Movement in stock price, interest rates, bonds etc.
2. Inflation or purchasing-power risk-is the chance that the cash flows from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation.
3. 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.
4. Legal Risk: This type of financial risk arises out of legal constraints such as lawsuits. Whenever a company needs to face financial loses out of legal proceedings, it is legal risk.
5. Operational Risk: This type of risk arises out of operational failures such as mismanagement, fraud, technical failures.
6. Credit Risk: This type of risk arises when one fails to fulfil their obligations towards their counter parties. Usually arises due to difficult foreign exchange policies and when one party makes the payment while the other party fails to fulfil the obligations.
7. Shortfall risk: it‘s the chance that the business won‘t have enough money to make its goals. You can face shortfall risk by being either too conservative or too aggressive; the best way to address this risk is to save more.
8. Political risk is the prospect that government decisions will damage the value of your investments.
