Reviews on Financial Risk Management Essay

3563 Words Apr 22nd, 2012 15 Pages
A Review on Financial Risk Management

Tianshu Hou
FMRM 0811
Dec. 2011

I. Introduction
II. The definition and types of financial risk
III. Risk management and the theoretical foundation
IV. The process of financial risk management
V. The challenges faced by the modern financial risk management theories

Financial risks are exposures of uncertainties for those participants in financial market. Financial risks can be divided into four categories: market risk, credit risk, liquidity risk and operational risk. Risk management has become more and more crucial for a market participant to survive in the highly competitive market. As the development of the global financial market, there are many phenomena that
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Financial risk arises through countless transactions of a financial nature, including sales and purchases, investments and loans, and various other business activities. It can arise as a result of legal transactions, new projects, mergers and acquisitions, debt financing, the energy component of costs, or through the activities of management, stockholders, competitors, foreign governments, or weather. (Karen A. Horcher).
Financial risk can be divided into the following types according to the different sources of risk.
A. Market risk. Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio. It 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. The influence of these market factors have over the financial participants can be both direct and indirect, like through competitors, suppliers or customers.
B. Credit risk. Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promised. Such an event is called a default. Almost all the financial transactions have credit risk. Recent years, with the development of the internet financial market, the problem of internet finance credit risk also became prominent.
C. Liquidity risk. Liquidity

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