Essence and types of financial risks
Entrepreneurial activity is always associated with risk. Typically, bring the most profit transactions with elevated risk. But at the same time to increase the level of risk increases the threat of losing financial stability and bankruptcy.
As an economic category means the probability of the risk of unexpected losses (reduction or complete loss of profits, loss of planned revenue, unforeseen expenses, loss of income or total equity) uncertainty in terms of financial and economic activity. Better understand the economic nature of the risk by using its classification on certain grounds.
Depending on the level of decision making are two types of risks: global and local.
Global risk - the risk level of the economy, caused by changes in the political situation in the country and macroeconomic parameters of development. These risks include political risks as well as risks associated with changes in legislation (fiscal, monetary, investment and etc.), Development of internal and external markets, financial markets and others.
Local risk - the risk that arise at the enterprise level. They may be related both to address the issues in daily financial and business activities (development management tactics) and the decisions in the long-term economic development (strategy development and separate financial policies).
The risks of current activities include:
- The risk of erroneous actions of financial managers (risk of loss of profits, increased operating costs and reduce the solvency etc.).
- Risk of natural forces (of force majeure).
With long-term (strategic) enterprises related development the kinds of risks that affect the development of financial policy with certain aspects of financial and economic activity. These risks include the risk of inflation, investment, share, interest, tax, risk losing financial stability and so on. Al. [/ Announce]
Depending on the duration of negative factors on the financial results all risks can be classified into:
- Long-term risks (associated with persistent negative trends of economic development);
- Short-term risks (associated with changes in market conditions).
Depending on the cause of risk are systematic and unsystematic.
Systematic risk - a risk that is not dependent on the financial and economic activities, and are objectively at the national level (inflation risk, interest rate, currency, tax, investment risk by changing macro- economic conditions, investment). In order to reduce the overall size of losses from systemic risks, the company must react to changes in macroeconomic parameters and develop effective adaptation mechanism.
Unsystematic (specific) risks directly depend on financial and economic activities and there are usually errors assuming control subjects. Unlike systemic risks that can not be regulated at the micro level, unsystematic risk can be prevented by developing the company special mechanism of neutralization.
By type of business activity distinguish industrial, commercial and financial risks.
The manufacturing risk arises in the production process in the event of disruption and reduction in production, material consumption and increasing complexity of products.
Commercial risk associated with selling products (services), procurement of raw materials, etc., and can occur in case the planned reduction in sales, increase in purchase prices, rising costs of rotation, the loss of production in the rotation. The level of commercial risk depends on the following factors:
- Stability of demand (the stable demand, the less varies realizable revenue, operating and net earnings);
- Stability of prices for finished products (the unstable prices, the more likely deviation realizable income and net earnings);
- Price stability of raw materials;
- Demand elasticity (ability to smooth out fluctuations in net profit, dictated by changes in commodity prices by increasing product prices);
- The ratio of fixed and variable costs (the level of operating liverydzhu).Financial risk arises when a company enters into a relationship with various financial institutions (banks, investment, insurance, factoring, leasing companies, stock exchanges, etc.). The causes of such risk is inflation factors, the increase in the average level of bank deposit and interest, reducing the value of securities and so on.
The scale of financial risk in those companies that are professional participants of the financial market usually much larger.
A more detailed look at the nature and causes of the most common today financial risk businesses.
1. The risk reduction of financial stability - caused by unsustainable capital structure of the enterprise, overpriced leveraged funds in the fall in demand for products and reduced profitability activity can lead to financial crisis or even bankruptcy. This risk is most dangerous in terms of possible devastating consequences for the owners of capital.
2. The risk of insolvency - it is probable that the company due to insufficient volume of liquid assets can not pay on time with its creditors. This risk is no less dangerous because when technical insolvency is not episodic, but constant, the company can quickly lose its financial stability.
3. Inflation risk - the risk of reducing the real value of capital in the form of monetary assets and depreciation of revenues and profits due to rising inflation.
4. Interest rate risk - the probability of loss due to changes in interest rates (lending and deposit) in the financial market. The negative consequences of this risk are:
- Increasing the cost of paying interest on a loan if the credit rate;
- Reduction of income on deposit in case of reduction of deposit rates;
- The need to increase the annual coupon rate on the bonds to meet investor expectations;
- The need to increase dividend payments in order to maintain stable shareholders and others.
5. Investment risk - a probability of increased costs, reduced income and gains from investment activities and the possibility of loss of all capital invested. Depending on the form of investment risks distinguish real and financial investment.
Risks related to real investment, wide choice of local investment facility; interruptions in the delivery of construction materials, equipment and raw materials; a significant increase in prices for construction works, construction materials, equipment, raw materials; and wide choice of contractor and others.
Risks associated with financial investments: wide choice of financial instruments for investment; financial complications or bankruptcy of the issuer; changes in investment conditions; direct investors and deceit, and others.
6. Deposit risk is a kind of investment and financial risk is the probability of default deposits in the wrong choosing a commercial bank for deposit transactions.
7. Credit risk arises from the enterprise in case of commercial customers (commodity) credit and the existence of threat of full or partial return.
8. Currency risk is typical for International Business and has two main forms: currency risk selection and change its course.
The risk currency selection occurs when the real value begins to decrease for calculation of hard currency due to inflation in the country of circulation.
The risk of currency fluctuations caused by the constant fluctuations of the currency market and means the probability of financial losses to exporters while reducing the rate of SLE and, conversely, the probability of financial losses importers - if its increase.
Regardless of the type now implemented financial and business transactions can take place risk profits. The risk associated with the possible occurrence of consequential damages or shortfall in earnings as a result of failure or delayed certain measures of managerial activities.