Disadvantages Of Financial Risk Management

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4.1 Financial Risk Management Financial risk management refers to the process of financially viable value in any organization. Financial instruments are put in use to assist the management team to manage disclosure to risk, principally credit risk and market risk. Other risks include equity risks, supplier risks, customer risks, partner risks, financing risks, liquidity risks and risks related to interest rates, exchange rates and commodity prices. The algorithm of financial risk management is similar to that of general risk management, the process is sub divided in three phases broadly – the first one being identification of risks’ sources, its assessment, and construction of the plans to address them. Qualitative and quantitative, both the…show more content…
VaR is calculated on the basis of degree of potential losses, the likelihood of the intensity of loss, and the time frame. To give you a better understanding suppose there is a hypothetical project run by a financial firm and the exposed one month value at risk is of 7 for the total capital of INR 20,000. This means that in any given month during the lifecycle of the project there is 7 per cent chance that it will incur the loss of INR 20,000. Another example is of any typical investment portfolio of a firm or an individual. If INR 10000 is the determined measure of VaR, at the rate of 38 per cent confidence level over a holding period of 29 days and theirs is no investment or sale till the 29th day, then there’s a 38 per cent chance that the portfolio holder will lose out INR 10000. VaR is approximation of the likely utmost loss. Actual losses may be above or below the estimated…show more content…
It is also known by stress tests, sensitivity tests, or ‘what if?’ analyses. Financial managers and there team sit down, discuss and create several hypothetical yet relevant scenarios and ask ‘what if’ this situation were to occur? Some of the questions can be developed like this - What if the there’s a downfall of 48 per cent in the stock market? What if there’s a rise of 29 basis points in interest rates by RBI? What if the exchange rates were to show a decrease by 30 per cent or increase by 29? What if an important client were to leave the firm? Once evaluated, the outcomes of these hypothetical scenario analyses are converted into a risk quantify by assuming the risk disclosure based on the computations and utmost loss forecasted is treated as the worst case

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