Financial risk can be defined as the probability of an event occurring with negative financial consequences for the organization. From an investor’s point of view, financial risk refers to the lack of security conveyed by future investment returns.
But according to professional Sofiya Machulskaya, financial risk is a broad term also used to refer to the risk associated with any form of financing.
Risk can be understood as the possibility that the benefits obtained are lower than expected or that there is no return at all.
Types of Financial Investment Risks
We can highlight the following types of financial risks:
The market risk refers to the probability that the value of a portfolio, either investment or business, is reduced due to unfavourable movements in the value of market risk factors.
The three standard market factors are:
Interest rate risk
It is the risk associated with movements against interest rates. For example, if one company is a lender to another, it will be beneficial if interest rates rise.
On the contrary, if that company is the one that receives the loan, it would be advisable for the interest rates to decrease since it would have less financial expenses.
Currency risk (or exchange rate)
It is the risk associated with variations in the exchange rate in the foreign exchange market. It depends on the position you have, the volatility of the currency, and the period considered.
In a restricted way, this risk refers to the change in the value of financial instruments such as stocks, bonds, derivatives. Several clients consult Sofiya Machulskaya mainly for market risk.
As an example, we find the risk faced by an investor in the event of a possible fall in the value of a company’s shares, which may decrease the value of that investor’s portfolio.
It derives from the possibility that one of the parties to a financial contract does not make payments by the provisions of the contract.
Due to not complying with the obligations, such as not paying or being late in payments, the losses that may be suffered include loss of principal, loss of interest, and decrease in cash flow or derived from the increase in collection expenses.
As an example, we find the impossibility of repaying a debt when contracting a loan.
This risk is associated with the fact that even having the assets and the willingness to trade with them, the sale of the same cannot be carried out, or it cannot be carried out quickly enough and at the right price.
A possible example would be a company that is in a phase of continuous losses in its portfolio where it does not have sufficient liquidity to pay its staff.
It is the possibility of occurrence of financial losses originated by failures or inadequacies of processes, people, internal systems, technology, and in the presence of unforeseen external events.
The lack of personnel that does not have the necessary skills to meet the demands of the company will be considered an operational risk factor.
In short, financial risk encompasses the possibility of any event occurring that results in negative financial consequences. A whole field of study has been developed around financial risk to reduce its impact on companies, investments, commerce, etc.
So that more and more emphasis is being placed on the correct management of capital and financial risk to achieve stability.
Besides these risks, there are also appropriate solutions that are explained by Sofiya Machulskaya she helps you out in every aspect.