Question

what are the main financial risk management tools and techniques? what are the steps involved in the financial risk management process?

Answer 1

Answer: Financial risk management- It is the management of financial risks, it is the process of reducing financial risk by some financial instruments and techniques.

Financial risk- Are of following types:

• Credit risk
• Default risk
• Foreign exchange risk
• Inflation risk
• Business risk
• Legal risk
• Reputation risk
• Operational risk

Financial risk management tools and techniques- Are as following:

Risk mitigating strategies- There are many financial instruments that minimize risk of business. These techniques are, use of forward, futures and options contract and swaps in business, hedging techniques and securitization are some techniques with the help of which, risk can be reduced.

1. Internal strategies- Hedging and Internal netting
2. Risk sharing strategies- Forward, futures, join ventures, swaps.
3. Risk transfer strategies- Options, securitization, Insurance.

Steps involved in the financial risk management process- Are as following:

1. Identify the risk- Firstly risk is identified. Type and nature of risk is identified. There are different types of risk as mentioned above.
2. Analyze the risk- Risk is analyzed thoroughly, scope of the risk is analyzed and relationship between risk and other factors is known.
3. Evaluate the risk- Impact of risk on various elements is evaluated. Risk should be ranked and prioritized. Risk can be low, moderate and high.
4. Treat/Minimize the risk- There are many risk mitigating techniques that should be analyzed and implemented so as to minimize the risk.
5. Monitor and review the risk- After implementing risk mitigating techniques, they should be reviewed and monitored regularly so the risk may not arise in future.