C IA L

FIN A N
RISK NT
G E M E
MA N A
 FINANCIAL RISK
MANAGEMENT
 Process to deal with the
uncertainties resulting from
financial markets.
 Involves assessing the financial
risks facing an organization and
developing management
 Strategies consistent with
internal priorities and
policiesStrategies for risk
management often involve
derivatives.
Risk Management Process

The process of financial

risk management
comprises strategies that
enable an organization to
manage the risks associated
with financial markets.
 NATURE OF RISK
RISK
 the uncertainty that a future event with
a favorable outcome will occur. In
other words, risk is the probability that
an investment will not perform as
expected and the investor will lose the
money invested in the project. All
business decisions and opportunities
are based on this concept that future
performance and returns are uncertain
and rely on many uncontrollable
variables.
 Nature of Business Risk
 Business risk can be defined as uncertainties or
unexpected events, which are beyond control.
In simple words, we can say business risk
means a chance of incurring losses or less
profit than expected. These factors cannot be
controlled by the businessmen and these can
result in a decline in profit or can also lead to a
loss.
 Business risk is the possibilities a company will
have lower than anticipated profits or
experience a loss rather than taking a profit
. Business risk is influenced by numerous 
factors, including sales volume, per-unit price,
input costs, competition, and the overall
economic climate and government regulations.
 SOURCE OF Risk
1. Natural Causes
 Nature is an independent phenomenon and
human beings have no control over it. Natural
calamities like earthquake, flood, drought,
famine etc. Affect a business a lot and can
result in heavy losses. The natural causes are
such type of uncertain factors that human
beings cannot make any preparation against
2. Human Causes
 Human causes are related to a chance of loss
due to human being or employees of the
organization. The dishonesty of employees
can bring heavy losses for business e.g., the
employees may leak a business secret to a
competitor and may commit fraud also bring
heavy losses by wastage of resources..
 SOURCE OF Risk

3. Economic Causes
 Economic causes are related to a chance of
loss due to change in the market. There can
be a change in the degree of competition. All
these have a direct impact on the earnings of
the business.
4. Physical Causes
 All the causes which result in damage of
assets are considered as a physical cause, for
example, change in technology may result in
machinery being outdated, use of old
technology, mechanical defects may also
result in damage of assets such as the
bursting of a boiler, accident to employee etc
 RISK MANAGEMENT
STRATEGY
Risk management is essential in any
business. It lays foresight for returns on
investments and projects all potential
backlash a company could face by
starting a new (or even routine)
endeavor.

Before determining the most effective

risk management strategy for your
situation, there are five steps to take in
first assess the risk and best solution.
 RISK MANAGEMENT
STRATEGY

1. Analyze the risk

Once you have identified risks,
you can thoroughly analyze the
potential effects that each will
have on consumer behavior, your
company and other current
endeavors.
 RISK MANAGEMENT
STRATEGY
2. Evaluate the risk
Now you can assign a ranking quality to
the likelihood of each risk’s outcomes.
This will help paint a picture around how
severely a risk threatens a project or
new product. You can also determine
the magnitude that each risk potentially
carries to destroy or support a new
tactic. The magnitude is a combination
of the risk likelihood and consequence.
 RISK MANAGEMENT
STRATEGY
3.Treat the risk
Since you have a grip on all possible risks and
their severity, you can begin to treat the worst
risks first. You’ll first want to look at the ways
you can reduce the probability of a negative risk
and then how to increase the probability of a
positive opportunity. At this stage of risk
assessment, preventative and contingency
should be prepared so that there are no
surprises as your move forward with action
plans.
 RISK MANAGEMENT
STRATEGY
4. Monitor the risk
By now, you know your risks, their
likelihood, what will happen if they occur
and how to go about defusing any disaster
that arises. What next? Monitor the risks
by tracking involved variables and
proposed possible threats to chain
reactions. As your tracking system
identifies changes, calmly treat the rising
problem to avoid widespread ripple effects
and the triggering of a big risk.
 BEST STRATEGIES FOR
TREATING THE RISK

1. Avoidance
Best case scenario, you can avoid risk
repercussion altogether. But in
forfeiting all activity that carries risk,
you also forfeit all associated
potential return and opportunity. It is
up to you what type of risk activity
you want to play with.
 BEST STRATEGIES FOR
TREATING THE RISK

2. Reduction
Risk reduction implements small
changes to reduce the weight of both
risk and reward post-event. The
reduction will require some process
and plan manipulation, but it will save
your company from a severe loss in
the case of a high-risk manifestation.
 BEST STRATEGIES FOR
TREATING THE RISK

3. Sharing
Risk sharing or transferring
redistributes the burden of loss
or gain over multiple parties.
This could include company
members, an outsourced entity
or an insurance policy.
BEST STRATEGIES FOR
TREATING THE RISK

4. Retention
Risk retention involves
assuming the loss or gain,
entirely. This option is best
for small risks where the
losses can be easily absorbed
and made up.
 COST OF RISK TO
FIRMS
COST OF RISK

 the cost of managing risks and

incurring losses. Total cost of risk is
the sum of all aspects of an
organization's operations that relate to
risk, including retained (uninsured)
losses and related loss adjustment
expenses, risk control costs, transfer
costs, and administrative costs
 COST OF RISK TO
COST OF RISK
FIRMS
Other factors that can include the following:
Transaction costs
Loss of reputation
Loss of market share
Additional training
Product loss
Production decrease
Claims reporting and investigation
Fines