Financial Risk Management
Financial risk is made of three basic types: market risk - FX risk, interest risk and commodity risk; counter-party risk - credit and partner risk; and liquidity risk - risk that the company will not have sufficient liquidity and/or credit lines to meet its current or future financial obligations.
Types of Financial Risk
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The biggest lesson from the financial crisis in 2008/9 was not that risk software failed to pick the early signs of the banking crisis, it was that treasurers needed to focus on not only the short term market trends, but also on the long-term risks. Reval's Okochi says. "Many statistical models, like Value at Risk, failed to work during the crisis and some companies are discarding this practice as a result. Although statistical models are less reliable when you have large standard deviation moves, as was observed at the height of the crisis, the real error was that companies were not combining their statistical models with sound stress tests that would have captured some of the unexpected moves."
Risk management will always require a combination of the latest statistical tools combined with independent market data and commonsense.
For the management of specific types of financial risk, see - interest rate risk, FX risk, credit and counter-party risk, and liquidity risk.
Overall Financial Risk Management and Hedging
The management of risk and hedging across all asset classes is now essential to comply with the growing range of accountings rules and regulations, and to be able to understand and manage the overall exposures and risks. Compliance of individual hedges and overall hedging strategy with accounting standards, such as FAS 133, IAS 39 and IFRS 7, is now a major concern in corporate treasury departments.
There are a many specialist advisors and consultants on financial risk management, as well as many of the systems and services suppliers who also provide advice.
The origins, the development path and focus of the multi-asset risk management systems are very different, as a result the focus on the main types of systems/SAAS services are:
- market data and information focused
- financial institution and bank dealing and risk management
- comprehensive corporate treasury and risk management
- specialist corporate risk management
- financial risk and hedging management.
All of these systems and services are used by corporates for multi-asset risk management to ensure maxiumum compliance with the accounting regulations and to minimise risk exposure.