The term “risk” describes the probability of an undesirable event happening as a result of a present decision or of some future event. In life, we face multitudes of these risks. Financial risk is something you can never eliminate, you can however minimize risk, diversification is one way.
The worlds of business and finance are not much different from our lives when it comes to risk-taking. In any business venture, owners or shareholders are bound to face risks. Like the risks we face in everyday life, some of these business risks can be easily handled and some cannot, and the process of deciding which is which belongs to the practice of risk management.
Risk management refers to the entire process of identifying, analyzing, evaluating, and treating risks. But since businesses are faced with many different types of risks, risk management specializations have also been created to deal with them.
And then there’s financial risk management, which is very similar to general risk management with a specialization in a business’s finances. Financial risk management also follows the processes of risk identification, analysis, evaluation, and treatment. Financial risk management, however, is more focused on finances and makes use of financial instruments to manage a business’s exposure to risks.
Instead of leaving businessmen with a variety of choices for risk treatment, financial risk marketing is focused primarily on hedging, which is the use of two counter-balancing investment strategies to offset the negative effects of price fluctuations. Aside from these differences, everything else is essentially the same.
Business men don’t have much choice but to face risks.It is for this reason that knowledge about financial risk management is very important in the business world. The practice won’t help businessmen avoid risks, but it gives them a chance to counterbalance the negative effects of risks whenever they have to take one.