Financial risk is one of the main problems of any business in different areas and geographies. This is why the FRM Financial Risk Manager exam has won huge recognition among financial experts around the world. FRM is the most serious offered to risk management professionals worldwide. Financial risk is again the basic concept of the FRM level 1 exam. Before you understand the techniques for risk control and risk management, it is very important to understand what is a risk and what are the types of risks. Let’s discuss the different types of risk in this post.
Risk and types of risks:
The risk can be called as the chances of an unexpected or negative result. Any action or activity that results in a loss of any kind can be called a risk. There are different types of risks that a company may face and must overcome. In general, risks can be classified into three types: business risk, non-business risk and financial risk.
- Business risk: These types of risks are taken by the business enterprises themselves to maximize the value and profits of shareholders. For example, companies take risks with high marketing costs to launch a new product to get higher sales.
- Non-business risk: These types of risks are not under the control of companies. Risks arising from political and economic imbalances can be called non-business risk.
- Financial risk: Financial risk, as the term implies, is the risk that includes financial losses for companies. Financial risk usually arises due to instability and losses in the financial market caused by the movement of stock prices, currencies, interest rates and others.
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Types of financial risks:
Financial risk is one of the types of high priority risks for any business. Financial risk is due to market movements and market movements can involve many factors. Based on this, financial risk can be classified into different types such as market risk, credit risk, liquidity risk, operational risk and legal risk.
This type of risk arises due to the movement in the prices of the financial instrument. Market risk can be classified as Targeted risk and Non-targeted risk. The risk of targeting is caused by movements in the share price, interest rates, etc. Undirected risk, on the other hand, can be risks of instability.
This type of risk arises when a person fails to meet its obligations to its counterparties. Credit risk can be classified as Sovereign risk and Settlement risk. Sovereign risk usually arises due to difficult monetary policies. Settlement risk, on the other hand, arises when one party makes a payment until the other party defaults.
This type of risk arises due to the inability to execute transactions. Liquidity risk can be classified as Liquidity risk of assets and Liquidity risk for financing. The liquidity risk of the assets arises either due to insufficient buyers or due to insufficient sellers against sales orders and purchase orders, respectively.
This type of risk arises from operational failures such as poor management or technical failures. Operational risk can be classified as Risk of fraud and Risk from the model. The risk of fraud arises due to lack of control, and the risk of the model arises due to improper application of the model.
This type of financial risk arises from legal restrictions such as lawsuits. Every time a company has to face financial losses from litigation, it is a legal risk.
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