Overview on Financial Risk Management
                     Financial Risk 
Management
2
Introduction
Financial risk management is the practice of 
protecting economic value in a firm by using 
financial instruments to manage exposure to 
risk: operational risk, credit risk and market risk, 
foreign exchange risk, shape risk, volatility risk, 
liquidity risk, inflation risk, business risk, legal 
risk, reputational risk, sector risk etc. 
SOURCE: en.wikipedia.org
3
Operational 
Risk
Operational risk – as defined by the Basel II 
framework – is the risk of indirect or direct loss 
caused by failed or inadequate internal people, 
system, processes or external events. 
SOURCE: www.staffordglobal.org
4
Foreign Exchange 
Risk
Foreign Exchange Risk is also known as currency risk, 
FX risk or exchange rate risk. It is incurred when a 
financial transaction is made in a currency other than 
the operating currency which is often the domestic 
currency of a business. 
The risk arises as a result of unfavourable changes in 
the exchange rate between the transactional currency 
and operating currency.
SOURCE: www.staffordglobal.org
5
Credit Risk
Credit risk is the risk that a borrower or client defaults 
on their debts or outstanding payments. With 
borrowed money, in addition to the loss of principal, 
additional factors such as loss of interest, increasing 
collection costs etc., must be taken into account when 
establishing the extent of the Credit Risk.
SOURCE: www.staffordglobal.org
6
 Reputational 
Risk
Reputational Risk is also known as Reputation Risk and 
it is the loss of social capital, market share or financial 
capital arising from damage to an organisation’s 
reputation. 
SOURCE: www.staffordglobal.org
7
Market Risk
As the name implies, a market risk is any risk that 
comes out of the marketplace in which your business 
operates. Businesses that adapt to serve the online 
crowd have a better chance of surviving than 
businesses who stick to the offline business model.
SOURCE: smallbusiness.chron.com
8
Liquidity Risk
Also known as funding risk, this category covers all the 
risks you encounter when trying to sell assets or raise 
funds. If something is standing in your way of raising 
cash fast, then it's classified as a liquidity risk.
SOURCE: smallbusiness.chron.com
9
Implement Financial Risk 
Control
10
Identifying the 
risk exposures
Risk management starts by identifying the financial 
risks, and their sources or causes. A good place to 
start is with the company's balance sheet. 
This provides a snapshot of the debt, liquidity, foreign 
exchange exposure, interest rate risk and commodity 
price vulnerability the company is facing. 
SOURCE: smallbusiness.chron.com
11
Quantifying the 
exposure
The second step is to quantify or put a numerical value 
on the risks you've identified. Of course, risk is 
uncertain, and putting a number on risk exposure will 
never be exact. 
Analysts tend to use statistical models such as the 
standard deviation and regression method to measure 
a company's exposure to various risk factors. 
SOURCE: smallbusiness.chron.com
12
Making a 
"hedging" 
decision
After you've analyzed the sources of risk, you must 
decide how you will act on this information. This 
decision is based on multiple factors such as the goals 
of the company, its business environment, its appetite 
for risk and whether the cost of mitigation justifies the 
reduction in risk.
SOURCE: smallbusiness.chron.com