Financial risk is linked to the possibilities that an investment will not give the intended results.
Financial risk is a notion that refers to the chances that the result of an operation linked to finances will not be as expected . The greater the financial risk, the greater the chances that the result will be different than expected.
It should be noted that a risk refers to the imminence, closeness or proximity of possible damage . The concept is associated with the possibility , therefore, of damage occurring. Financial , for its part, is that related to finances (public treasury, funds or assets).
Example of financial risk
Suppose a man wants to invest $100,000 in bonds. Before making the decision, analyze the situation of different countries to determine which one offers bonds with the highest profitability and lowest financial risk.
After studying the country risk and other indicators, the investor decides to buy the bonds of country
Financial risk analysis seeks to avoid losses.
Credit and liquidity
Financial risk appears in different types of operations. Credit risk refers to the possibility that one of the parties to a contract linked to a loan transaction does not comply with its obligations. A person, when he deposits money in a banking institution, assumes a certain credit risk, since the bank in question may fail and not return the money.
Liquidity risk is another financial risk. This type of risk is assumed by financial companies that grant loans and that need to have (liquid) cash on a permanent basis to be able to operate.
Financial market risk
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 what appears in the operations that take place within the financial markets . It should also be noted that this financial risk can be of three different types:
- 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.
- Exchange risk . It is the one that comes into play with respect to changes in the prices of foreign currencies.
- Interest rate risk , which is the risk that exists with respect to rising or falling at a time when interest rates are not desired.
Other types
In addition to those already mentioned, within the scope at hand, reference is also made 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 cope with the level of operations being undertaken.
- Legal risk , which is related to the possibilities of there being changes at a legal level.
- Operational risk , which is what occurs when there is the possibility of using systems that are not adequate or optimal.