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Identifying and Managing Risk - Research Paper Example
Finance & Accounting
Pages 3 (753 words)
Identifying and Managing Risk Introduction The subject of financial risk management is concerned with the use of financial instruments in an organization in order to reduce the exposure of the organization to several types of risk. The various types of risks mitigated though financial risk management techniques are market risk, credit risk, foreign currency risk, liquidity risk, inflation risk, etc…
The market risk is associated with the uncertainties in the areas of foreign exchange rate fluctuations, fluctuation of interest rates, fluctuation of stock prices and commodity prices. The market risk is managed by the use of interest rate swaps, options and future. The use of derivatives in financial market is important to hedge market risks. The risk management techniques are used to reduce the credit risk of the organization which occurs as a result of default of the counterparties. The credit ratings are used to assess the credit risk of organizations. The credit risk is reduced by limiting the exposure to the parties considered to be risky for repayment (Deventer, Imai and Mesler, 2013). The other credit risk management tools used are by the use of collaterals, periodic marking to the market, captive derivative subsidiaries and netting. Netting is a risk management technique through which the amount of cash owed by one party to another is reduced by the amount by the latter to the former. ...
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