Question

what is the difference between bussiness (operational) risk and financial risks?

Answer 1

Business risk refers to the risk that the firm faces in daily running of its business. This is done when the firm is trying to enhance the purpose for which it stands ie maximize the shareholder value. Some examples of business risk are a) Competition - ie when the competitive rivalry in the market increases for the same customer base, the business risk increases. (b) Economic risk- when the economy goes through a recession, the firms risk also increases c) Legal risk- If the firm is in an industry subsumed by high legal risks like mining, arms and ammunition, real estate, the firm's risk also increases.

Financial risk is a risk that causes financial damage or losses to the firm. The primary cause of financial risk can be attributed to movements in the market(stock, currency, interest rate etc). Some of the major financial risk parameters include

a) Market risk - The risk due to market movements  b) Credit risk - Risk arising out of non fulfillment of obligations or commitments to counter parties  c) Liquidity risk - Risk arising due to liquidity conditions ie buyer and seller insufficiency and d) Operational risk- Risk arising due to technical glitches, operational failures or other mis-management.