The Important Role of Financial Risk Management

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Financial risk management is not contemporary. It has risen because of the increase in global markets and their instability. Changes in global markets occur instantaneously which lead to risks with managing finances. Hence the concept of Financial Management has become a basic best practice, to ensure mitigation of unforeseen losses.

Definition of Financial Risk

Risk means the possibility of loss due to exposure to certain circumstances. In any financial investment, there is a chance that the actual return will be much lesser than expected. This chance is referred to as Financial Risk. Managing this risk to minimize financial losses is the best practice known as Financial Risk Management.

The relationship between risk and returns is such that; the greater the amount of risk, the greater the possibility of greater return. This is because, the greater the risk and investor takes, the more there will be compensation for taking the risk.

As a best practice, many companies spend a lot of time and money on developing risk management strategies. These strategies help them in managing the risks associated with their investments. The key component of risk management is risk assessment. Risk assessment means determining the risks surrounding a business or investment through the following processes:

Hence, financial risk management is an essential best practice which minimizes losses through implementation of controls and compliance.

Further reading: Corporate Governance | Audit | Performance Improvement

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