What is financial risk?
What Does financial risk Mean
A risk refers to the imminence, proximity or proximity of eventual damage . The concept is associated with the possibility, therefore, of a damage occurring. Financial , on the other hand, is that related to finances (public finances, flows or goods).
The notion of financial risk refers to the chances that the result of an operation linked to finances is not what was expected . The higher the financial risk, the greater the chances that the result will be different than expected.
Suppose a man wants to invest $ 100,000 in bonds. Before making the decision, analyze the situation of different countries to determine which is the one that offers you bonds with the highest yield and lowest financial risk. After studying the country risk and other indicators, the investor decides to buy the bonds of country X since he considers that it is the nation that offers him the greatest security regarding the results he hopes to obtain.
Financial risk appears in different classes of operations. We speak of credit risk with reference to the possibility that one of the parties to a contract linked to a loan operation does not fulfill its obligations. A person , when depositing money in a banking institution, assumes a certain credit risk, since the bank in question may fail and not return the money.
The liquidity risk is another financial risk. This type of risk is assumed by finance companies that extend credit and need to have money in cash (liquid) permanently to operate.
However, we cannot ignore the existence of other types of financial risk. This would be the case, for example, of the so-called market risk, which is the one that appears in what are the operations that take place properly within the financial markets. It should also be noted that, in turn, it can be of three different classes:
-Market risk itself, which is one of the most common and which occurs when there is a danger that losses may occur in a portfolio, as a result of different factors on which it depends.
-Risk of exchange. Of this other type, we must emphasize, above all, that it is the one that comes into play with regard to changes in the prices of foreign currencies.
-Risk of interest rates, which is the one that exists with respect to rising or falling at a time when you do not want what interest rates are.
However, in addition to those already mentioned, within the scope that concerns us also refers to other types of financial risks, such as the following:
-Risk of capital insufficiency, which refers to the possibility of not having sufficient capital to be able to face the level of the operations that are being undertaken.
-Legal risk, which is related to the possibilities of changes at the legal level.
-Operational risk, which is the one that exists when it is possible to make use of systems that are not adequate or optimal.