Financial risk management 1526304 215158890 2008-05-26T23:38:21Z Kuru 764407 rmv red link from 'see also' section {{Corporate Finance}} '''Financial risk management''' is the practice of creating economic value in a [[business|firm]] by using [[financial instruments]] to manage exposure to [[risk]], particularly [[Credit risk]] and [[Market risk|market risk]]. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general [[risk management]], financial risk management requires identifying its sources, measuring it, and plans to address them. As a specialization of [[risk]] management, financial risk management focuses on when and how to [[hedging|hedge]] using financial instruments to manage costly exposures to risk. In the banking sector worldwide, the [[Basel Accords]] are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks. ==When to use financial risk management== Finance theory (i.e., [[financial economics]]) prescribes that a firm should take on a project when it increases [[shareholder]] value. Finance theory also shows that [[management|firm managers]] cannot create value for shareholders, also called its [[investment|investors]], by taking on project that shareholders could do for themselves at the same cost. When applied to financial risk management, this implies that firm managers should not hedge risks that investors can hedge for themselves at the same cost. This notion is captured by the [[hedging irrelevance proposition]]: ''In a [[perfect market]], the firm cannot create value by hedging a risk when the price of bearing that [[risk]] within the firm is the same as the [[price]] of bearing it outside of the firm.'' In practice, financial markets are not likely to be perfect markets. This suggests that firm managers likely have many opportunities to create value for shareholders using financial risk management. The trick is to determine which risks are cheaper for the firm to manage than the shareholders. A general rule of thumb, however, is that [[market risk]]s that result in [[unique risk]]s for the firm are the best candidates for financial risk management. ==References== * {{cite book | author=Crockford, Neil | title=An Introduction to Risk Management (2nd ed.) | publisher=Woodhead-Faulkner | year=1986 | id=0-85941-332-2}} * {{cite book | author=Charles, Tapiero| title=Risk and Financial Management: Mathematical and Computational Methods| publisher=John Wiley & Son | year=2004 | id=ISBN 0-470-84908-8}} * {{cite book | author=Lam, James | title=Enterprise Risk Management: From Incentives to Controls | publisher=John Wiley | year=2003 | id=ISBN-13 978-0471430001}} * {{cite book | author=van Deventer, Donald R., Kenji Imai and Mark Mesler| title=Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management | publisher=John Wiley| year=2004 | id= ISBN-13: 978-0470821268}} == See also == * [[Market risk]] * [[Corporate governance]] * [[Credit risk management]] * [[Liquidity risk]] * [[Risk adjusted return on capital]] * [[Risk modeling]] * [[Risk pool]] [[Category:Mathematical science occupations]] [[Category: Risk in finance]] ==External links== * [http://www.garp.com Financial Risk Manager Certification Program - Global Association of Risk Professional (GARP)] [[he:ניהול סיכונים פיננסיים]]