FINANCIAL RISK

MANAGEMENT
 INTRODUCTION
DEFINITION
 The process of evaluating and managing current and

possible financial risk at a firm as a method of decreasing the

firm's exposure to the risk. 
 Focuses on when and how to hedge using financial instruments to

manage costly exposures to risk.

WHEN TO USE FINANCIAL RISK MANAGEMENT
 Risk which shareholders cannot take

 Unique risks- Best Candidates

WHY TAKE RISKS?

• Dividend or interest

• Build a diversified Portfolio

 WHAT IS RISK &
TYPES OF RISK
DEFINITION
 Chance that an investment's actual return will be

different than expected.

TYPES OF FINANCIAL RISK

 Credit risk

E.g..: The bankruptcy of a counterparty

 Liquidity risk

E.g..: A temporary inability to convert assets to cash

 Systemic risk

If Mr. A defaults then there arrises systemic risk

 Unsystematic Risk

E.g..: News that affects a specific stock such as a

sudden strike by employees.
 Operational risk

E.g.: The HR department takes care of personnel

risks
 THE RISK ANALYSIS
PROCESS
 Identify The Risk
 Lists of possible risk sources

 Risks are then categorized and prioritized

 Assess the risk

 Identify The Root Causes

 What would cause this risk?

 How will this risk impact the project?

 Develop Responses To The Risk

 Project team is ready to manage /prevent the risk

 Develop Preventative Measures

 Convert into tasks those ideas that were identified

 STRATEGIES
 Transferring the risk to another party
For Example:
Mr. A Insurance company

 Avoiding the risk:


 Reducing the negative effect & accepting some or all of
the consequences of a particular risk

Ideal Risk Management

Intangible risk management
Faces difficulties allocating resources
 MANAGING DIVERSIFICATION
 Diversification

 Risk control sound investment

 To increase the profitability of the business or an

investors portfolio

 The loss in one sector can be set off with the profitability
in other line of sector.
MANAGING RISK BY INVESTORS

“Don’t put all eggs in one basket”

 RISK EXPOSURE TO INVESTORS
 When you invest, you take certain risks.

 But how do you figure out ahead of time what those

risks might be?

 Which ones you are willing to take?

 Which ones may never be worth taking?

RISK FACED BY INVESTORS
DIVERSIFYING YOUR PORTFOLIO

CASH
 Say, If Mr. A has invested only in Shares & again he had
invested all his shares in XYZ Co.
 If Shares of XYZ Co. fall then

CASH
THE RISK-REWARD
TRADEOFF
 RISK MANAGEMENT
BY
INVESTORS

Mr. A- Fixed Rate

(8%)
Mr. B- Floating Rate
Assumption:
1.Opposite Views

2.You are Mr.A

 INTEREST RATE SWAP

 Change of
interest rate
- Fixed to
floating

 Change of
interest rate-
floating into fixed
rate (8.5%)

SCENARIO 1 SCENARIO 2
Interest rate ↑ to 9.5% Interest rate ↓ to 6%
Mr.A gets 9.5% ROI Mr.A gets 6% ROI
& &
Mr. B gets 8.5% ROI Mr. B still gets 8.5%
 FINANCIAL RISKS MANAGEMENT BY
INSURANCE COMPANIES
 The role of insurers in the financial sector.
 Risks contained in the insurer’s product are not all borne
directly by the insurer itself.
 It should accept only those risks that are uniquely a part
of the insurer’s array of services.
 Catastrophe risk can be offset somewhat by undertaking
a position in catastrophe futures and perhaps even in
catastrophe bonds.
 They can offer products which absorb some financial
risks, while transferring some of these risks to the
purchaser.
 REINSURANCE
 XYZ LTD. has insured its industry against fire with Bajaj Allianz for Rs.20
crore
 Bajaj Allianz feels that the risk is huge
 Re-insurance to transfer/spread risk
 Finally, risk of 20 crore is divided as follows:
 NATIONAL OTHER FOREIGN
INSURANCE COUNTRIES
COMPANY INSURANCE
COMPANIES
 CASE STUDY- TAJ HOTEL
 Terrorism is one of the catastrophe risks that is
covered under risk pool
 An add-on with property insurance
 The trident complex has a total insurance cover of
Rs1,430 crore
 Personal accidents and individual deaths
 Hotels have their separate liability policies
 Leading insurer -Tata AIG general insurance co.
 Co-insurers -ICICI Lombard general
insurance co. Ltd
IFFCO Tokio general
insurance co. Ltd.
 Terrorism claims are settled from a common pool
managed by the state-run general insurance
corporation.
 RISK DIVERSIFICATION BY
COMPANY

 Specialization by diversification

 A company should diversify its knowledge area and

highly concentrate in its products and market area.

 Management risk also known as company risk

 For example Reliance industry

“RELIANCE INDUSTRY PRIVATE LIMITED”
 Risk controls measure Diversification

 The principal ideas is that if any Reliance sector goes

devalue,other Reliance sectors will cop up with it.

 Diversification also helps in getting profitability to

company
 CONCLUSION
 Financial risk management is one of the core
components of financial management study.

 Financial Risk management help you reach a serious

managerial position, it also makes you deal with money
better.

 It has become a common practise in financial institutions

protect against the adverse effects of uncertainty