1.1.

Definition of financial risk

Financial risk is only the inability of the hospitality project to generate enough cash to support the debt the service. Due to the riskiness of certain hotel projects. (John 1991, p.100) Financial risk is the additional variability in returns to shareholders that arises because the financial structure contains debt.(Glen 2002,p.813)

Financial risk is the additional risk placed on the common stockholders as a result of the decision to finance with debt. (Stanley & Geoffrey 2005, p.272)

Financial risk is a part of the total risk to shareholders returns that arises from the method of financing the business. The more highly capital(financially) geared, the higher the level of financial risk. (Eddie2006,p.500)

Types of risk Credit 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. Investment risk has been shown to be particularly large and particularly damaging for very large, one-off investment projects, so-called "megaprojects". This is because such projects are especially prone to end up in what has been called the "debt trap," i.e., a situation where due to cost overruns, schedule delays, etc. the costs of servicing

debt becomes larger than the revenues available to pay interest on and bring down the debt.[6] Market risk

This is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices:

Equity risk is the risk that stock prices and/or the implied volatility will change. Interest rate risk is the risk that interest rates and/or the implied volatility will change. Currency risk is the risk that foreign exchange rates and/or the implied volatility will change, which affects, for example, the value of an asset held in that currency. Commodity risk is the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change.

Liquidity risk

This is 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 risk:

Asset liquidity - An asset cannot be sold due to lack of liquidity in the market essentially a sub-set of market risk. This can be accounted for by: o Widening bid-offer spread o Making explicit liquidity reserves o Lengthening holding period for VaR calculations Funding liquidity - Risk that liabilities: o Cannot be met when they fall due o Can only be met at an uneconomic price o Can be name-specific or systemic

1.2.

financial risk effect in hospitality industry

Financial risks are risks which impact on business success in hospitality industry. William and Raymond consider that financial risk influence investment. Financial risk and business risk contribute to the overall risk of the investment and hence the investments risk premium. Financial risk relates to the inability of the firm to meet its debt obligations. Business risk relates to the company achievement which express the firm is unable to hold its competitive position, maintain stability, and growth in its earning. Moreover, the risk premium will be greater or less for different types of investments. (William & Raymond 1993, p.103) Besides, Alan claims that financial risk is generally associated with decision-making when talking about the topics like investments, credit and buying and selling shares. (Alan 2002, p.41) Consequently, shareholders need to use risk premium to determine if the hotel or business is worth to invest or not. However, Atkinson, Berry and Jarvis claim that financial risk is related to the capital structure of a business, i.e. the way in which it finances its assets, and by adjusting the type of finance or the mix of equity finance to debt finance the financial risk can be altered. Choosing various sources of finance ,a business needs to bear in mind the use of the finance ,the limitations of the source of finance ,the cost, the repayment terms and timing, and the availability of alternatives.( Atkinson, Berry & Jarvis 1995, p.153) Meanwhile, they also refer that financial risk influence shareholders return. Ordinary shareholders of high risk are getting a better return than the shareholders of low risk. (Atkinson, Berry & Jarvis 1995, p.166) It means high risk investments of shareholder may be getting a greatest return, but shareholders also burden a high risk of loose all the investments. From Ruth and Keith point of view, they deem that financial risk effect financial strategies. The concept of financial risk can be combined with the business risk profile, in order to develop logical alternative financial strategies for different types of hotels. For example, high risk businesses should adopt low risk financing structures, primarily equity based. Similarly, low risk businesses can improve shareholders return by taking on debt, increasing their financing risk. (Ruth & Keith 2002, p.38)As a result, hotels should select the financial strategies according to their actual situation.

In a summary, financial risk is crucial for hotel decision makers as well as hotel investors. Financial risk will help decision makers to do the financial strategic according to the real hotel situation. On the other hand, hotel investors can use financial risk to balance how many benefits they will make as a return, the higher risk they have ,the

higher return they maybe receive. Moreover, financial risk plays an important role in making financial strategy, making investment decision, influencing capital structure and investors returns.