Research on financial risks

1 Research on financial risks 
2 Types of financial risks

Financial risk refers to the possibility of losing money in an investment or business venture, and companies face the risk of debt default, but they may also face breach of covenant, which leads to a financial burden on the company.[1] Financial risk can be defined as the possibility of an unexpected outcome. Or negative, where the risk is defined as any work or activity that results in a loss of any kind, there are different types of risks that the company may face and must manage.[2] Financial loss for companies, and financial risks generally arise as a result of instability of financial markets and losses resulting from changes in stock prices, currencies, interest rates, etc. [2]Financial risks abound and come in all shapes and sizes, affecting just about everyone. Be aware that there are financial risks. Knowing the risks and how to protect yourself will not eliminate the risks, but it will help mitigate the risks and reduce the likelihood of negative outcomes.

2. Types of financial risks

Market risk is considered one of the most important types of financial risks, and this type of risk has a wide scope because it arises as a result of the dynamics of supply and demand, and economic uncertainties that can affect the performance of all companies rather than a single company are a major source of market risk.[3] Sources of market risk include changes in the prices of assets, liabilities, and derivatives. This is the risk faced by an importing company that pays for supplies in dollars and then sells the finished product in local currency. If the value of the company's currency decreases, it may suffer losses that prevent it from fulfilling its financial obligations.[3]

credit risk

Credit risk is of paramount importance in financial risk management, and this risk refers to the possibility that the creditor will not receive the loan late. As a result, credit risk is used to assess a debtor's ability to honor repayment obligations, and credit risk is divided into two categories: retail and wholesale.[3] The former refers to the risks associated with lending money to individuals and small businesses using mortgages, credit cards, or any other form of credit. . On the other hand, wholesale credit is the result of an organization's investments, whether in corporate acquisitions, mergers, or the form of sales of financial assets.[3] The case of subprime mortgages in the United States, which contributed to the economic crisis of 2008, exemplifies how when credit risk arisesIt is not managed properly, and the unemployed or low-income people are given high-risk, high-interest mortgage loans.[3] Banks have begun to expand the profile of mortgage applicants in order to increase income. However, the debt was not paid on time because the applicants were unable to pay. This situation led to the failure of thousands of banks in the United States and endangered the reputation of others.[3]

Liquidity risk

It is important for financial risk management to take corporate liquidity into consideration, as each institution must ensure its ability to repay its debts, by making sure that it has sufficient cash flow, as failure to do so risks undermining investor confidence. Liquidity risk is exactly what it sounds like. It indicates the possibility of the company failing to meet its obligations. One reason for this may be poor cash flow management.[3] A company can own a large number of shares while also being exposed to a high level of liquidity risk. This is because these assets cannot be converted into cash for their immediate expenses. Real estate and bonds, for example, can take a long time to convert into cash.[3]

Operational risk

Operational risk is included under different types of financial risk, and there are different types of operational risk. These risks arise as a result of the company's lack of internal controls, technological failure, mismanagement, human error, or lack of employee training.[3] These risks almost always lead to financial loss for the company, as operational risks are among the most difficult to quantify. To be able to calculate them accurately, the company must keep a historical record of failures of this kind and recognize the possible link between them, and these risks can be avoided if it is believed that the presence of a particular risk can cause additional risks.