Financial risk management tools and techniques

For instance, exchange rates and interest rates are strongly linked to each other. The co-dependency of these risks should be taken under account while structuring the framework of Investment and Financial Risk Management. Financial risk management aims to protect the firm from these risks by using several financial instruments.

It can be quantitative and qualitative both. Investment and Financial Risk Management subject involves managing the relationship between internal aspects of financial institutions and the external factors that influences the investment. Also, it deals in modern financial markets. Investment and Financial Risk Management proffers foundational understanding about underpin modern investment and risk management techniques.

A firm needs to understand the intensity and types of potential risks it is prone to. Regression Analysis — This approach is used to study the effect on one variable when the other one changes. VaR is measured with respect to the amount of potential loss, the probability of that amount of loss, and the time frame.

For example, a financial firm is exposed to 5 per cent one month value at risk of INR 50, This implies that there is a 5 per cent chance that the firm has to bear a loss of INR 50, in any given month. Suppose another firm owns an investment portfolio on which they determine the VaR to be INR ,, at a 50 per cent confidence level over a 40 day holding period.

Now, if no investments are infused or sold over within 40 days then there is a 50 per cent chance that the firm might lose out INR , VaR is estimate of the possible maximum loss.

Actual losses may be above or below the estimated value. Sometimes futures contracts and tradable credit derivatives are also included. Security analysis is further sub-categorized into fundamental analysis , which works in accordance to different fundamental business factors such as financial statements, and technical analysis , which focuses upon price trends and momentum.

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Here are a few financial risk management tools and techniques that can help you out: Internal Strategies Internal Strategies Internal strategies are essentially strategies where the business would accept the risk and manage it internally within the framework of normal business operations.