In financial market, both buyers and sellers of financial instruments have to face several risks. These risks are relating to return on investment, shortage of liquidity, fluctuations in foreign exchange and many others. So, we can say, financial risk is uncertainty of return and liquidity. Happening of this risk may be very harmful for business. Financial crisis and financial disasters are main result of financial risk and it can liquidate any company. In case small business, one may have the chance to lost the capital or entire money.
Types of Financial Risk
Liquidity Risk
Liquidity risk means risk of not receiving cash at the time when we need it. Its other name is cash risk.
Solvency Risk
Solvency risk is the part of financial risk like liquidity risk. In this risk, company is not capable to pay his debt.
Interest Rate Risk
It is the risk for debtor, if he has to pay high amount to creditor due to increasing interest in future. It is also risk for creditor, if he will receive less interest due to decreasing the interest rate in future. This risk will be on all interest bearing financial instruments like bonds, short term credit or other debt.
Equity Risk
We can delineate equity risk as the risk of loss of investment amount in equity shares due to change in the prices of stock market.
Legal Risk
Legal risk can happen in the form of legal penalty or legal charges due to changes the laws, rules and regulation of government. This potential loss may happen due to not act upon on the any notification which was given by law of respective country or any other reasons.
Currency Risk
Currency risk is not only for traders who trades in currency or foreign exchange market but every person who is providing goods and services in foreign country.
Commodity Risk
Govt. may increase taxes on commodities which will increase the cost of commodities. Many other risks may also include in commodity risk. If a trader gets his goods from foreign country, risk of damage of commodity can also include in commodity risk.
Operational Risk
Except these minor risks, all other major terrorism attack risk may be included in operational risk. Main reason of these risks is not use perfect and strategic business decision. Some of operational risks are out of control of businessman.
Types of Financial Risk
Liquidity risk means risk of not receiving cash at the time when we need it. Its other name is cash risk.
Solvency risk is the part of financial risk like liquidity risk. In this risk, company is not capable to pay his debt.
It is the risk for debtor, if he has to pay high amount to creditor due to increasing interest in future. It is also risk for creditor, if he will receive less interest due to decreasing the interest rate in future. This risk will be on all interest bearing financial instruments like bonds, short term credit or other debt.
We can delineate equity risk as the risk of loss of investment amount in equity shares due to change in the prices of stock market.
Legal risk can happen in the form of legal penalty or legal charges due to changes the laws, rules and regulation of government. This potential loss may happen due to not act upon on the any notification which was given by law of respective country or any other reasons.
Currency risk is not only for traders who trades in currency or foreign exchange market but every person who is providing goods and services in foreign country.
Govt. may increase taxes on commodities which will increase the cost of commodities. Many other risks may also include in commodity risk. If a trader gets his goods from foreign country, risk of damage of commodity can also include in commodity risk.
Except these minor risks, all other major terrorism attack risk may be included in operational risk. Main reason of these risks is not use perfect and strategic business decision. Some of operational risks are out of control of businessman.
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