All Topics  
Financial risk

 

 
   Email Print
   Bookmark   Link
 

 

Financial risk
 
 
  Topics Financial risk Topic Home

Financial risk is normally any risk
Risk

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences....
 associated with any form of financing
Finance

The field of finance refers to the concepts of time, money and risk and how they are interrelated. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important....
.

nding on the nature of the investment, the type of 'investment' risk will vary. High risk investments have greater potential rewards, but you may lose your money instead by taking the risk for more money.

A common concern with any investment is that you may lose the money you invest - your capital.






Discussion
Ask a question about 'Financial risk'
Start a new discussion about 'Financial risk'
Answer questions from other users
Full Discussion Forum



Encyclopedia


Financial risk is normally any risk
Risk

Risk is a concept that denotes the precise probability of specific eventualities. Technically, the notion of risk is independent from the notion of value and, as such, eventualities may have both beneficial and adverse consequences....
 associated with any form of financing
Finance

The field of finance refers to the concepts of time, money and risk and how they are interrelated. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important....
.

Investment related

Depending on the nature of the investment, the type of 'investment' risk will vary. High risk investments have greater potential rewards, but you may lose your money instead by taking the risk for more money.

A common concern with any investment is that you may lose the money you invest - your capital. This risk is therefore often referred to as capital risk.

If the assets you invest in are being held in another currency there is a risk that currency movements alone may affect the value. This is referred to as currency risk.

Many forms of investment may not be readily salable on the open market (e.g. commercial property) or the market has a small capacity and may therefore take time to sell. Assets that are easily sold are termed liquid therefore this type of risk is termed liquidity risk
Liquidity risk

In finance, liquidity risk is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss ....
.

Debt related

  • Credit risk
    Credit risk

    Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit ...
  • Interest rate risk
    Interest rate risk

    Interest rate risk is the risk borne by an interest-bearing asset, such as a loan or a Bond , due to variability of interest rate. In general, as rates rise, the price of a fixed rate bond will fall, and vice versa....


Insurance related

  • Insurance industry


Business related

The risk that a company or project will not have adequate cash flow
Cash flow

Cash flow is the balance of the amounts of cash being received and paid by a business during a defined period of time, sometimes tied to a specific project....
 to meet financial obligations; thus causing the business to file for bankruptcy.

Financial risk is the additional risk a shareholder bears when a company uses debt in addition to equity financing. Companies that issue more debt instruments would have higher financial risk than companies financed mostly or entirely by equity.

Bilateral barter
Barter

Barter is a type of trade in which product or Service are directly exchanged for other goods and/or services, without the use of Money. It can be bilateral or multilateral, and usually exists parallel to monetary systems in most developed countries, though to a very limited extent....
 can depend upon a mutual coincidence of wants
Coincidence of wants

The coincidence of wants problem is an important category of transaction costs that impose severe limitations on economies lacking money and thus dominated by barter or other in-kind transactions....
. Before any transaction can be undertaken, each party must be able to supply something the other party demands. To overcome this mutual coincidence problem, some communities had developed a system
System

System is a set of interacting or interdependent entities, real or abstract, forming an integrated whole.The concept of an "integrated whole" can also be stated in terms of a system embodying a set of relationships which are differentiated from relationships of the set to other elements, and from relationships between an element of the se...
 of intermediaries
Intermediary

An intermediary is a third party that offers intermediation services between two trading parties. The intermediary acts as a conduit for goods or services offered by a supplier to a consumer....
 who can warehouse and trade goods. However, intermediaries often suffered from financial risk.

Whilst higher risk normally implies higher overall rewards, this is not always the case. For example a high risk mortgage client may be required to pay a higher interest rate on their mortgage repayments in order to be accepted as a bank's customer. However, this higher mortgage rate will in itself increase the risk to the bank that the customer cannot meet their interest payments, further increasing the risk.

This circular risk problem can lead to markets not existing for high risk borrowers. The 2007/8 sub-prime crisis may have some links to this argument. Higher interest rates for high risk borrowers make the borrowers even less likely to be able to pay back the loan, further increasing the default risk.

See also

  • Optimism bias
    Optimism bias

    Optimism bias is the demonstrated systematic tendency for people to be over-optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events....
  • Systemic risk
    Systemic risk

    Systemic risk is the risk of collapse of an entire system or entire market and not to any one individual entity or component of that system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries"....