Finance
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Financial Risk
There are various types of risk associated with finance, most often businesses are concerned with ‘downside risk’, which refers to the potential for financial loss, and extent uncertainty.
In the Finance risk module of the Risk Dashboard we help you measure your financial risk by asking you key questions about aspects of finance which can indicate developing financial problems. This allows you to analyse trends and potential threats that could have a negative impact on your business, and gives you the foresight to take any corrective measures before issues grow to an uncontrollable level.
Controlling Risks
There are many varied types of financial risks that an organisation can encounter:
Asset-Based Risk
Risk that the changes in one or more assets that support an asset-backed security will significantly impact the value of the supported security. Risks include interest rate, term modification, and prepayment risk.
Credit Risk
Also called default risk, is the risk associated with a borrower going into default (not making payments as promised). Investor losses include lost principal and interest, decreased cash flow, and increased collection costs. An investor can also assume credit risk through direct or indirect use of leverage.
Foreign Investment Risk
Risk of rapid and extreme changes in value due to: smaller markets; differing accounting, reporting, or auditing standards; nationalisation, expropriation or confiscatory taxation; economic conflict; or political or diplomatic changes. Valuation, liquidity, and regulatory issues may also add to foreign investment risk.
Liquidity Risks
Liquidity Risks are the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). There are two types of Liquidity Risks:
Asset Liquidity
An asset cannot be sold due to lack of liquidity in the market. This is essentially a sub-set of market risk, and can be accounted for by widening bid-offer spread, making explicit liquidity reserves, and lengthening holding period for VaR calculations.
Funding Liquidity
This refers to the risk that liabilities cannot be met when they fall due, can only be met at an uneconomic price, and can be name-specific or systemic
Other Financial Risks Include:
Market Risk
The four standard market risk factors are equity risk, interest rate risk, currency risk, and commodity risk
Equity Risk
This is the risk that stock prices in general (not related to a particular company or industry) or the implied volatility will change.
Interest Rate Risk
Interest rate risk is the risk that interest rates or the implied volatility will change
Currency Risk
Currency risk is the risk that foreign exchange rates or the implied volatility will change, which affects, for example, the value of an asset held in that currency
Commodity Risk
Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) or implied volatility will change
The heart of good Finance practice sits within the Risk Dashboard software.