Definition of Financial Risk Management
Financial risk management is a method in where a firm practices its economic valuation using some financial instruments in order to manage minimal exposure to risk, especially to credit risk and market risk. There are several forms of risks which are Foreign exchange, Liquidity, Volatility, Sector, Shape, Inflation risks. When financial risk management is initializing it needs sources, the methods of measurement and ultimately strategies to identify them.
- Financial risk management which can take both forms of quantitative and qualitative is a specialized part of risk management, focuses on to determine the time and the usage of hedge with proper financial instruments to manage costly exposures to risk.
- In other words, it can be explained as the guidelines that define the company’s policies on accepting financial risk. When an individual is involves in financial risk management will not be able to make any investment decision for a company.
Books on Financial Risk Management
Book 1:
Elements of Financial Risk Management By Peter F. Christoffersen (published by Academic Press, 2012)
Book 2:
Financial Risk Management: Models, History, and Institutions By Allan M. Malz (published by John Wiley & Sons, 2011)
How Financial Risk Management works?
Financial risk management at Quaker Oats,
Quaker Oats is the ideal example of how in today’s financial atmosphere, a large manages its risks possibilities. There are a wide range commodity like oats, corns and wheat which is used as raw material for making cereals, and other consumer products which are bought by Quaker. The changing price rates of these commodities affect directly and indirectly on the cash flow and profitability of the company. As international brand Quaker receives payments in many currencies like German Marks, Canadian Dollars and Mexican Pesos, in a way Quaker is exposed to uncertain changes in UK dollars price of foreign currencies- foreign exchange rate risk. To minimize the risk, Quaker uses debt accounts as well as equity to finance its operations, resulting the changing interest in profitability by which the common shareholder of the company can acquire returns.
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