Financial risks can be broadly categorized into market risk, credit risk, and liquidity risk.
Market Risk: It refers to the risk of losses in investments due to the movement of market factors such as interest rates, exchange rates, and stock prices. Businesses and investors often manage market risk through diversification, hedging strategies using financial derivatives, and asset allocation.
Credit Risk: This type of risk arises from the potential for borrowers or counterparties to default on their financial obligations. To manage credit risk, businesses and investors conduct thorough credit analysis, set credit limits, and use tools like credit derivatives and credit insurance.
Liquidity Risk: Liquidity risk is the risk of not being able to buy or sell assets quickly without significantly affecting their prices. Businesses and investors manage liquidity risk by maintaining adequate cash reserves, establishing lines of credit, and monitoring cash flows.
Overall, managing these financial risks involves a combination of risk assessment, proactive risk management strategies, and the use of financial instruments and tools to mitigate potential losses.
