Financial Analysis. Lesson 15. Risk Management and Mitigation Strategies
Financial Analysis. Lesson 15. Risk Management and Mitigation Strategies
Risk management identifies, assesses, and mitigates potential financial threats.
Operational risk relates to losses from failed internal processes or systems.
Credit risk assesses the likelihood of borrower default on obligations.
Market risk represents potential losses due to unfavorable market changes.
Liquidity risk arises when assets cannot be sold quickly without loss.
Reputational risk threatens a company's public image and investor confidence.
Compliance risk involves financial loss due to regulatory or legal breaches.
Risk appetite defines the level of risk a company is willing to accept.
Risk assessment evaluates risk likelihood and impact to prioritize mitigation.
Risk transfer shifts risk to another party, such as an insurer.
Hedging uses financial instruments to reduce exposure to specific risks.
Diversification spreads investments to minimize potential losses in one area.
Contingency planning prepares strategies for unexpected financial disruptions.
Insurance protects assets against potential losses from specified events.
Risk monitoring involves regularly reviewing and updating risk management practices.
Stress testing assesses financial stability under extreme, hypothetical conditions.
Scenario analysis evaluates how different scenarios impact financial performance.
Derivatives are contracts used to hedge against price movements.
Risk matrix ranks risks by severity and frequency to guide responses.
Capital reserves set aside funds to cover unexpected financial losses.
Technical Examples:
Hedging helps mitigate potential losses from currency exchange rate fluctuations.
Stress testing prepares financial institutions for adverse economic events.
Risk transfer allows companies to limit loss exposure via insurance.