Financial risk management

Categories of
Financial risk
Credit risk
Market risk
Liquidity risk
Investment risk
Business risk
Profit risk
Non-financial risk

Institutions

Certifications

Financial risk management is the practice of protecting economic value in a firm by managing exposure to financial risk - principally credit risk and market risk, with more specific variants as listed aside - as well as some aspects of operational risk. As for risk management more generally, financial risk management requires identifying the sources of risk, measuring these, and crafting plans to mitigate them.[1][2] See Finance § Risk management for an overview.

Financial risk management as a "science" can be said to have been born[3] with modern portfolio theory, particularly as initiated by Professor Harry Markowitz in 1952 with his article, "Portfolio Selection";[4] see Mathematical finance § Risk and portfolio management: the P world.

The discipline can be qualitative and quantitative; as a specialization of risk management, however, financial risk management focuses more on when and how to hedge,[5] often using financial instruments to manage costly exposures to risk.[6]

  • In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.[7][8]
  • Within non-financial corporates,[9][10] the scope is broadened to overlap enterprise risk management, and financial risk management then addresses risks to the firm's overall strategic objectives.
  • In investment management[11] risk is managed through diversification and related optimization; while further specific techniques are then applied to the portfolio or to individual stocks as appropriate.

In all cases, the last "line of defence" against risk is capital, "as it ensures that a firm can continue as a going concern even if substantial and unexpected losses are incurred".[12]

  1. ^ Peter F. Christoffersen (22 November 2011). Elements of Financial Risk Management. Academic Press. ISBN 978-0-12-374448-7.
  2. ^ Financial Risk Management, Finance Glossary. Gartnergartner.com
  3. ^ W. Kenton (2021). "Harry Markowitz", investopedia.com
  4. ^ Markowitz, H.M. (March 1952). "Portfolio Selection". The Journal of Finance. 7 (1): 77–91. doi:10.2307/2975974. JSTOR 2975974.
  5. ^ Cite error: The named reference Welch was invoked but never defined (see the help page).
  6. ^ Allan M. Malz (13 September 2011). Financial Risk Management: Models, History, and Institutions. John Wiley & Sons. ISBN 978-1-118-02291-7.
  7. ^ Van Deventer, Nicole L, Donald R., and Kenji Imai. Credit risk models and the Basel Accords. Singapore: John Wiley & Sons (Asia), 2003.
  8. ^ Drumond, Ines. "Bank capital requirements, business cycle fluctuations and the Basel Accords: a synthesis." Journal of Economic Surveys 23.5 (2009): 798-830.
  9. ^ John Hampton (2011). The AMA Handbook of Financial Risk Management. American Management Association. ISBN 978-0814417447
  10. ^ Cite error: The named reference chron.com was invoked but never defined (see the help page).
  11. ^ Cite error: The named reference Kenton was invoked but never defined (see the help page).
  12. ^ Cite error: The named reference PRMIA was invoked but never defined (see the help page).