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FINANCIAL RISK

I. INTRODUCTION
The time has come to talk about financial risk, as they say 'it is not
All that glitters is not gold, meaning not all the results obtained by the entity or
In an investment, they are the expected, which can be both negative and positive.
Thus, we can say that financial risk refers to the variability of the
expected benefits for the shareholder.

This is why it is also known as credit risk or insolvency risk,

financial risk refers to the uncertainty associated with the performance of the
investment due to the possibility that the company cannot meet its obligations
financial obligations mainly, to the payment of interest and amortization
of the debts.

RISK OBLIGATIONS
FINANCIAL FINANCIAL

Financial risk is closely connected to economic risk given that

that the types of assets a company owns and the products or services that
offer play an extremely important role in the service of your debt.
All organizations, regardless of their size, face internal factors and
externals that create a certain degree of uncertainty. The effect of this
Uncertainty about the objectives is the risk. That is why it is not known if the
things will deviate from what was planned. It is a reality that every organization
must foresee and wait.

Risk measurement and management is a relatively new discipline that has

arisen with great dynamism after episodes of instability and crisis
financial entities that emerged in the eighties and nineties (such as by
example: the external debt crisis in most Latin American countries in
the eighties, the fall of the New York Stock Exchange in 1987, and that of the companies
.com in the late 90s.

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II. DEFINITION
Financial risk is associated with any form of financing. Risk is
it can be understood as a possibility that the benefits obtained are less than
the expected ones or that there is no return at all.
Therefore, financial risk encompasses the possibility of any event occurring.
that leads to negative financial consequences, including the possibility of
whether the financial results are greater or lesser than expected.
In fact, given the possibility that investors place bets
financial movements against the market, movements in one direction or another
they can generate both profits or losses depending on the strategy of
investment.

III. RISK ACCORDING TO THE TYPE OF COMPANY

From the investor's point of view, the way to protect oneself against risk
financial is to place your money in those organizations that lack
risk of insolvency or very low, that is, the State, companies
public and private companies with low debt ratios.

On the other hand, a business with low economic risk will have few chances.
to find themselves in difficulties when it comes to servicing their debt (due to
for example, food companies, telecommunications, oil companies, gas companies, etc.
they tend to have low economic risk, while those that are immersed
in cyclical businesses such as, for example, toy manufacturers and consumer goods
capital, they have it high).

IV. EFFECTS OF FINANCIAL RISK

Higher risk, higher return

Lower risk, lower return
Most likely the market value of your investments (the value of
the company's market will fluctuate.
The higher the interest rate you have to pay for it, the greater
probability the sum of interest and principal repayment will become a
problem for the company.

V. TYPES OF FINANCIAL RISK

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There are different types of financial risk. Thus, we can distinguish the following
groups:

A. Market Risks
B. Credit Risks
C. Liquidity Risks
D. Operational risk
[Link] riskosovereign risk.
[Link] risk.

MARKET RISK
It refers to the uncertainty generated by the behavior of factors.
external to the organization, it can already be changes in the variables
macroeconomic or risk factors, where 5 types of risks are distinguished
such as:

a) THE INTEREST RATE RISK

Interest rate risk is the risk that an investor bears in the face of
variations in interest rates in a direction different from expected.
It is the risk that the price of a security that earns a fixed interest, such as
it can be a bond, a debt, or a loan, is affected by a
variation of market interest rates.
In general, an increase in theinterest rates market influences
negatively in the price of a fixed coupon bond and conversely a
the decrease in interest rates will positively affect the quotation of
fixed coupon bonds.
Interest rate risk is measured by the duration of the bond, the longer the
the greater the life of the title, the greater this risk increases.

b) EXCHANGE RATE RISK OR CURRENCY RISK

Exchange rate risk or currency risk is the phenomenon that involves

an economic agent places part of their assets in a currency,
the financial instrument denominated in a currency different from the one it uses
this agent as a basis for their daily operations.

Exchange rate fluctuations give rise to a certain risk factor

that increases according to the volatility in the price of
these coins.

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This risk affects those emissions denominated in foreign currencies when the
price variation is detrimental to the investment position. It is worth noting
to remember that a currency is not necessarily considered a coin in
cash, so we will define currency as any deposit in an entity
financial institution of a foreign country or the documents that grant the right to
to dispose of said deposits.
The exchange rate, being a relative price, is affected by the value of
either of the two prices of the currencies and the determinants of these,
therefore assessing exchange rate risk is a task that involves knowing the
components that determine the value of currency in terms of another.
c) RISK OF MERCHANDISE
It refers to the risk associated with changes in product prices.
basics. Establishes the company's exposure when its value depends
of the price behavior of certain goods in markets
national and international.

d) INFLATION RISK

It is a consequence of the loss of purchasing power that is generated by

increases in inflation. The risk of inflation arises when there is some
probability that due to inflation purchasing power will be lost against
the initial projections. The increase in prices not only decreases
the purchasing power of investors, but also does
decrease the value of your savings.
e) MARKET RISK
In a restricted sense, market risk refers to the change in
the value of financial instruments such as stocks, bonds, derivatives, etc.

B. CREDIT RISKS

Credit risk is the possibility of economic loss arising from

non-compliance with the obligations assumed by the counterpartsof a contract.
The concept relates to financial institutions and banks but it can be
to extend to companies, financial markets and organizations from other sectors.
Possibility of deterioration of the borrower's credit quality, as well as the
problems that may arise with the collaterals or guarantees.
The analysis of various components such as size must be considered.
credit, maturity, creditworthiness of the counterparty, guarantees, endorsements, among
others

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Credit risk can be classified according to various credits. A

classification would be based on who bears the risk. In this way, the types of
credit risk would be:

a) CREDIT RISK SUPPORTED BY INDIVIDUALS

Individuals, and not just financial institutions and companies, are exposed.
and they assume credit risk in many of their daily activities.

For example, when you deposit your money in a bank, when are you assumed
contractual obligations to make a deposit (for example when making
a rental contract) or simply working for someone else since it
assume the risk that the company or payer does not pay your salary.

b) CREDIT RISK SUPPORTED BY COMPANIES

The main credit risk that companies take on is selling on credit.

in which the risk is assumed that the customer who has purchased a merchandise
finally I didn't pay. In this sense, most companies have, or
they hire external services, with risk assessment departments
they study the feasibility of selling on credit to each customer.

c) RISK DE CREDIT SUPPORTED FOR INSTITUTIONS

FINANCIAL

One of the daily activities of banks and financial institutions is

the granting of credits to clients, both individuals and corporations.
These credits can be in the form of loans or lines of credit (such as
credit cards) and other products. The financial entity assumes the risk
that the debtor fails to pay their debt and agreed interests. The
banks usually require certain guarantees and impose certain clauses
additional charges that vary according to the client's risk assessment; thus,
for example, they may charge higher interest rates for clients with
more risk or they can impose a debt limit on companies to the
that they have been granted a loan.

d) TERM OR MATURITY RISK

It refers to the expiration date of the titles, the greater it is
the longer the expiration date, the more risky the bond will be, the higher the premium will be
risk and in turn, the required rate of return will be higher.

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e) RISK OF DEFAULT
Measures the ability to pay both the principal and the interest. The
investors demand a risk premium to invest in securities that do not
they are exempt from the risk of non-payment. In the risk analysis of
default play a fundamental role the rating agencies of
risk.

RISK RATING AGENCIES

Credit rating agencies are specialized companies that

dedicate themselves to the analysis of fixed income emissions, in order to assess the certainty of
prompt and full payment of the principal and interest of these, as well as the existence
legal, the financial situation of the issuer and the structure of the issuance, to
establish the degree of risk of this last one.

These agencies assign ratings to all kinds of private issuances,

public, sovereign, etc.

The analysis of credit risk is becoming increasingly important in the field

of the businesses, and their attention is primarily supported by changes in
factors that affect and alert the market in general, such as growth
structural of bankruptcies, increase in levels of competition, decrease of
guarantees or collateral, advanced technology, growth of operations
outside of organized markets, among others.
Credit risk, viewed from the perspective of value creation for the
shareholders, assumes that the granting of credit and the returns obtained in
the treasury operations that have exposure to default risk,
they must generate a return higher than the weighted average cost of the
resources, and therefore to the opportunity cost of the invested capital, in relation to the
options offered by the market with the same level of associated risk.
GRADING SCALES

The grading scales for long-term debt used by the

rating agencies are as follows:

Fitch

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AAA AAA Aaa Ability to pay interest and repay the principal
AA AA Aa2 Very strong ability to pay interest and repay principal
A A A2 Strong ability to pay interest and repay the principal.
The protective factors are considered adequate but
they may be susceptible to worsen in the future.
BBB BBB Baa2 The protection of interest and principal payments can be
moderate, the payment capacity is considered adequate.
Adverse business conditions could lead to a
inadequate capacity to make interest payments and the
principal.
BB BB Ba1 Speculative degree. It cannot be considered that the future is
insured. The protection of interest payments and the principal
it is very moderate.
B B B2 The guarantee of interest or principal payments can be
small.
Highly vulnerable to adverse business conditions.
CCC CCC Caa2 Vulnerability identified the noncompliance.
Continuity of payments dependent on the conditions
financial, economic, and business conditions are favorable.
CC CC Ca Highly speculative.
C C As Imminent non-compliance
D D C Speculative values. Their value may not exceed the value of
refund in case of liquidation or reorganization of the sector

Standard & Poor's applies a plus (+) or minus (-) sign in the categories
"AA" to "CCC" indicating the relative position within each category.

The ratings ranging from 'AA' to 'CCC' on the scale of

FITCH, can be modified by adding (+) or (-) to show their
relative position within each of the main categories.

The scales they use for the qualification of short-term debt are the
following:

Fitc S& Meaning

h P
F1 A-1
It is the highest rating indicating the degree of security of

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The charge at the agreed moments is very high.

In the case of Fitch and S&P, it may be accompanied by the symbol + if the
security is extreme.
F2 A-2 The ability to properly service the debt is
satisfactory, although the level of security is not as high as in the
previous case.
F3 A-3 Satisfactory payment capacity, but with greater vulnerability, than
in the cases previous a the changes
adverse in circumstances
B B It usually involves sufficient payment capacity, but some
adverse circumstances would seriously condition the service of the
debt.
C C This rating is assigned to short-term debt with a doubtful
paying capacity.
D D The debt classified with a D is in default. This category
it is used when the payment of interest or principal has not been made
the due date, even if there is an unexpired grace period.

MEASURES OF RISK LEVELS

Risk level measures can be grouped into five general concepts:

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CREDIT EXHIBITION
Establish the value of the maximum loss that would occur during the lifetime of
an obligation in the event that there are breaches of the
counterpart at the present moment (current exhibition) or at any time
moment in the future during the life of the operation (Potential Exposure or
Future)

Credit Provision
The credit provision is referred to as the expected value of losses.
credit, from the current date until the due date of the
operation will be equal to the average value of the unpaid amounts brought to value
present. It is considered an expense, given that it is the best
estimation of the losses that are expected to be suffered. Provisions constitute
actually a reserve that, in the long term, allows the entity to absorb the
losses that can be generated as a result of their bankruptcies
counterparts.

3) RECOVERY RISK
It refers to the possibility that the credit grantor has to recover in
partial or total payment of the overdue amount of the credit and the associated interests
same. The recovery risk can be associated with three factors
fundamental Guarantees or collateral, Guarantors – co-debtors, Aspects
legal matters such as acknowledgment of the debt, documents to take
a legal action, procedures, among others.

4) CAPITAL IN CREDIT RISK

The capital in Credit Risk is the estimated value that covers the maximum
estimated loss of value of a portfolio, caused by credit reasons.
A certain level of confidence and a specific deadline must be determined (a
a reasonable time horizon is one year). It refers to the allocation of
capital to be able to absorb credit losses.

LIMITS ON THE GRANTING OF CREDIT

Limits up to which losses can be admitted in case of

non-compliance, in accordance with the guidelines set forth in the plan
annual business.
The following parameters must be taken into account:
Authorization levels.
Diversification in the granting of credit (economic sector, location
geographic, types of clients, etc.), which allows reducing the concentration.

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Establish the borrowing capacity.

Compliance with the business plan. Credit destination. Economic groups
(Subsidiaries, subordinates, etc.).
Current and future economic cycle of the client.
Conditions that directly affect the customer.
Credit term.
Macroeconomic variables that directly affect the customer (interest rate
interest, devaluation, revaluation, etc.)
Size and competitiveness of the company. Quality of management.
Economic situation of the country.
Macroeconomic factors and sectoral indicators.
Behavior of national and international financial markets.
Existing correlation between each of the credits that make up the
portfolio
Economic groups to which it belongs (Subsidiaries, subordinates, etc.)

C. THE LIQUIDITY RISK

It refers to the possibility that the company may not be able to fully meet its
commitments as a consequence of lack of liquid resources.

It is the contingency that the entity incurs excessive losses from the sale of
assets and the execution of operations in order to achieve the necessary liquidity
to be able to fulfill their obligations.

The liquidity risk is associated with credit risk, for example, a company
As a result of the breach of a commitment in an obligation, it must
make a prepayment of the financial debt as stipulated in the contract to
cargo, which is not planned in his cash flow, therefore he resorts to the
alienation of assets that are considered easily negotiable.
There are various types of liquidity, among them are:

a) LIQUIDITY OF ASSETS

An asset cannot be sold due to a lack of liquidity in the market.

essence would be a type of market risk). Given this lack of liquidity, one can
see an increase in the spread between the price, leading to the operation to
I made it at a less appropriate price.
b) FINANCING LIQUIDITY

Risk that liabilities cannot be satisfied in theirexpiration dateo

that can only be done at an inappropriate price.

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1. IMPLICIT ELEMENTS IN THE CONCEPT OF LIQUIDITY

PREPAYMENTS: Partial or total advance payment of obligations owed by
the company, which can generate liquidity needs.

GROWTH EXPECTATIONS: Justified by policies and strategies

internal

ACCESS TO THE FUND MARKET: Ease or difficulty for the company

to access immediate liquidity resources.

MATURITY OF OBLIGATIONS: Due date of

Financial obligations and other liabilities

SEASONALITY OF CASH FLOWS: It is a determinant of

Liquidity Risk and Corresponds to specific periods or dates,
statistically established in which high volumes are presented
cash outflows such as payments for raw materials, payment for labor
of work, payment of financial obligations, tax payments, among others.

2. ACCORDING TO THEIR LIQUIDITY, THE ASSETS

They are classified into:

IMMEDIATE AVAILABILITY: Refers to investments for very short

term, in some cases redeemable on the same day, that are considered
general for unforeseen expenses or payment of commitments that are not very
representatives.

LIQUID ASSETS: These are investments with maturities of up to one year,

CDTs, REPOS, commercial papers, etc., usually with a term of 90
days and high liquidity.

INVESTMENT: Investments with terms longer than one year, of lower liquidity
(mainly bonds) but with higher profitability.

3. FACTORS THAT AFFECT THE OPTIMAL BALANCE OF LIQUID ASSETS

oCOST OF INSUFFICIENCY OR SCARCITY: The costs of scarcity can
adopt forms like the following:

. Higher expenses due to interest payments for obtaining resources.

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. Greater discounts on asset sales.

. Loss of discount for cash payment.

. Deterioration of the company's credit rating.

. Possible financial insolvency.

oRETENTION COST: It refers to the profit that would not be received.

company for keeping resources in liquid assets instead of placing them in
another type of higher-yielding assets.

In the management of liquid resources, it is very important to maintain a level

suitable for them, as maintaining an excess of liquid resources, although
it reduces liquidity risk, increases the company's hidden costs, due to
that these excess resources could be placed in more productive assets than
generate additional profit for the company.

4. Optimal Liquid Assets Balance

It occurs when the minimum amount of liquid assets is maintained, with which
they can easily fulfill the commitments made, without this meaning that
opportunity costs may be incurred by keeping liquid resources.

It can be established that the optimal balance of liquid assets is present.

when the retention cost crosses with the insufficiency cost. Graphically it
present in the following way.

D. OPERATIONAL RISK
This type of risk is related to mistakes made when giving instructions or when
liquidate operations. In most cases, the root of the problem lies in failures.
occurring in the process of monitoring and controlling the positions taken.

Derivative of the execution of the activities inherent to a company or trade.

It includes a wide variety of factors such as those related to personnel, risk of
fraud or due to the environment, among thecountry or sovereign risk it is one of the most
influential.

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Operational risk can arise as a result of:

Internal Control Deficiencies.

Failures in Processes, Inadequate Policies and Procedures.

Human errors and frauds. Failures in computer systems.

[Link] RISKOSOVEREIGN RISK

It is all risk inherent to transnational operations and, in particular, to the
financing from one country to another. The importance of considering the risk
country, in credit operations, grew rapidly with the development of
foreign trade, of multinational companies and, above all, of the
international banking operations. Bankers soon discovered that
Financing clients in other countries means facing a series of problems.
new and different. To do this, they must study the political characteristics,
economic, social and even psychological aspects of the countries with which it tries
establish relationships. They must also study the legal and tax aspects
existing in other nations.

The most common danger of transnational credit operations arises from the
possibility of the foreign debtor, at the time of maturity of the
transactions, it is impossible for you, for regulatory reasons or other factors outside of your
control or responsibility, to transfer the corresponding funds to the lender. In
In light of this, the term is sometimes mistakenly considered synonymous with risk of
transfer. However, the latter refers only to one of the aspects of
country risk. The general concept includes other risks, such as expropriation and
nationalization.

The country risk is theriskfrom an economic investment due only to factors

specific and common to a certain country. It can be understood as an average risk
of the investments made in a certain country. It measures the political and economic tone,
public safety, etc. (If there is a war, there is security, types of taxes,
etc.)

Country risk is understood to be related to the eventuality that a

sovereign state is unable or incapacitated to fulfill its
obligations with any foreign agent, for reasons outside of the usual risks
that arise from any credit relationship

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[Link] RISK.

It is one that derives from the global market uncertainty that affects more.
or less than all existing assets in the economy.

It is important to keep in mind that, given the uncertainty associated with the
aggregate economy, this risk cannot be eliminated through the
diversification; hence, it is also referred to as non-diversifiable risk or
market risk. For example, an economic recession or a rise in interest rates.
interest rates negatively affect almost all companies (although
not necessarily to the same extent).

VI. RISK MANAGEMENT

Risk Management is what allows for the identification, analysis, and evaluation of risks.
of individuals, companies, corporations, and public and private enterprises, defining
measures for their elimination, reduction, retention, and transfer with the aim of
preserve material, immaterial, and personal assets, and allow them to achieve
their objectives.
This methodology requires the organization implementing it to integrate its methods.
within the business strategy and allows the organization to know and learn to
live with the risks that affect their activities, countering their effects
negatives and taking advantage of the opportunities they present. The advantages and
opportunities should be considered not only within the framework of business activity
in itself, but also in relation to all stakeholders in the company,
numerous and varied, to which it may affect.
Enterprise risk management is a process carried out by the board.
executive of an entity, the management and the staff of that entity. It is
applied in the establishment of strategies for the entire company, designed to
identify potential events that may affect the entity and manage them
risks to provide reasonable security and integrity regarding the achievement of
objectives.

A- FUNCTIONS OF RISK MANAGEMENT

Protect the company's assets (material, immaterial, and personal).

Disclose the risks that affect the company and involve everyone
instances of the same in its management.
Empowers the company to achieve its objectives by increasing its
probabilities of success and reducing their uncertainties.
It involves constant and rigorous management.

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B- OBJECTIVE OF RISK MANAGEMENT

The objective of risk management is to reduce various risks related to
a preselected scope at a level accepted by society. It can
referring to numerous types of threats caused by the environment,
technology, human beings, organizations, and politics. On the other
side, involves all available resources by human beings or, in
particularly, by a risk management entity (person, organization).
It must methodically address all the risks surrounding the activities.
past, present, and especially future of the company.
C- ADVANTAGES OF RISK MANAGEMENT
Minimize Crisis Management
Minimize surprises and problems
Gain Competitive Advantage
Reduce general variations of the project
Increase the probability of project success
Increase profitability
Prevent problems from occurring, or if they do occur, prevent their escalation.

D- DISADVANTAGES OF RISK MANAGEMENT

A higher implementation cost, given the difficulty it represents

integrate three different management systems. This requires the company to clarify
the dilemma of reducing costs or improving management.
A greater dedication of resources, both human and material, by
part of the company.

WHEN DO WE NEED MANAGEMENT OF

RISKS?

The answer is obvious, "all the time." All decisions involve minimizing,
reduce or eliminate risk, whether decisions made in operations
daily or decisions regarding important policies, strategies or new
projects. Within this context, we often have to make decisions about
very quickly and often based on intuition, but it is very important
think about the risks that this might involve.

We must not forget that Risk Management should occur throughout

development and implementation of a policy, program, or project.

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When talking about Risk Management, we must take into account that it is a very
extensive and on which several conventions have been dedicated just to reach a
consensus and perfect it at the same time. We must also remember that there are many
entities that have already implemented and gradually improved their functioning,
thanks to the development of Risk Management.

Regarding the workers who operate within an entity, the management

Management must work on making them understand that this type of
management that goes hand in hand with Internal Control is a tool that we must
implement to achieve the objectives.

VII. FINANCIAL RISK MANAGEMENT

Uncertainty exists whenever one does not know for sure.
what will happen in the future. The risk is the uncertainty that
"It matters" because it affects people's well-being..... All
A risky situation is uncertain, but there may be uncertainty.
without risk. (Bodie, 1998).
For this reason, a financial risk manager is responsible for
advisory and management of exposure to risk for corporates or companies
through the use of derivative financial instruments.
One can appreciate the difference between objectives and functions of management.
financial risks.

OBJECTIVES FUNCTIONS

Identify the different types of Determine the level of tolerance or aversion to

risks that can affect the risk.
operation and/or expected results of
an entity or investment.

Measure and control the "non- Determination of the capital to cover a

systematic,” through the risk.
instrumentation of techniques and
tools, policies and Monitoring and control of risks.
implementation of processes. Guarantee returns on capital to the
shareholders.

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Identify alternatives to reallocate capital

and improve performance.

VIII. RISK MANAGEMENT PROCESS

IDENTIFICATION AND SELECTION OF RISKS

Identify the risks to which the company is exposed, taking into account
count the characteristics of it, in such a way as to recognize the
vulnerability to market, credit, liquidity, legal, operational risks,
etc., and their associated risk factors such as interest rates, types of
exchange rate, inflation, growth rate, stock prices
non-compliance, insolvency, among others, based on current and potential risk
identified.
2) EVALUATION AND MEASUREMENT OF RISKS

It refers to the measurement and assessment of each of the identified risks.

calculating the effect they have on the value of investment portfolios and
financing, as well as establishing a map of positions that allows for identification
specifically the concentration of the portfolio.
3) ESTABLISHING ACCEPTANCE LIMITS FOR RISK

Determine the maximum risk levels. The limits should be established in

function of the degree of risk tolerance by the entity, the capital that
wants to risk the liquidity of the markets, the expected benefits, the strategy
of the business and the experience of the taker

The company must daily measure the market risk of its positions
comparing it with the established limits.
It is necessary to incorporate a structure of limits that allows determining the levels.
maximums up to which the company is willing to accept losses as
consequence of the fluctuation of risk factors.
4) SELECTION OF RISK MANAGEMENT METHODS

AVOID THE RISK: It is decided not to proceed with formalization

the operation that generates the risk.
MANAGE THE RISK: The risk is accepted but reduced to a minimum.
level optimizing the Risk-Return relationship

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Managing risk requires knowledge of market evolution and

the expectations, application of techniques based on the variability of the
risk factors. Likewise, it is necessary to analyze the instruments
available in the market, or those that may be developed, to
to provide coverage, partial or total, for the risks to which it is exposed
exposed the entity.
Absorb the risk. Cover the risk with your own resources.
the company is exposed.
Transfer the risk. Transfer to a third party the risk to which it is exposed.
company either by selling the position or acquiring an insurance policy.

5) MONITORING AND CONTROL

The quality of the performance of identification and measurement models is valued.

the financial risks, as well as compliance and efficiency of the limits
Established. Through monitoring, deficiencies are promptly recognized.
of Risk Management. In this phase, monitoring will be carried out on the
selected indicators in the previous stage and the efficiency of the
the same in the management of financial risks. The goal is to ensure solvency and
stability of the company, with an adequate management of financial risks, that
allows achieving balance between profitability and the risk taken in the
operations, in such a way as to optimize the risk-return relationship.

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IX.

WAYS TO MINIMIZE RISK

The first way to minimize risk is by assessing the profitability of the

investment, taking into account that, the more information one has about what
the more you want to invest, the lower the risk will be.

Anticipating the future. The gathering of information is an element

important, since if you know how to handle that information it will allow us to continue
an innovative business strategy that will help us decide on
our products and services, reacting to our competition,
anticipate the changes that are taking place in the market, in the
technology, etc.
Diversifying risk, planning an investment portfolio that balances
high-risk operations with high-security operations.
Evaluating the results obtained.
With a professionalized administration, that is, highly
specialized in the new trends of the financial system, we can
move forward in the face of these risks.
Use tools for managing financial risk, such as
like, Delphos.

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Protect certain assets by contracting insurance.

Hedging, or coverage, basically consists of combining assets in the
same portfolio with the aim of offsetting the fluctuations of some against others
the fluctuations of others. When hedging is done, it is like hiring a
sure in the face of situations contrary to what was expected. But one should not
to confuse, this is NOT an insurance to prevent situations from occurring
unexpected and negative but is carried out to reduce the impact of these
situations in our portfolio of positions. This means carrying out
strategies using financial instruments and available tools
in the market to offset the risk of a position, that is,
investors hedge one investment against another investment
compensatory. The administrators of a portfolio, investors,
corporations or banks use hedging techniques practically daily
to reduce exposure to risk.

X. FINANCIAL RISK OVER TIME

Whenever you invest, there is the risk of losing what you put in or that the investment
it does not have the expected behavior. Therefore, in finance, the risk is that the
effective return on an investment is lower than the expected return. The
Risk is a type of uncertainty that can be quantified.

Due to the above, there are experts who dedicate themselves to studying the situations of the
markets and analyze examples of previous events to understand how they work
operations and what affects them.

Although, so far there is no infallible formula or method that

guarantee the success of any investment, there are ways to measure the probable risk.
for potential investors to prepare and know if they are willing to
put your resources into a certain financial instrument.

One of the general rules that risk in finance follows is that: the greater
risk, greater possibility of gain and vice versa.

A. The time factor

Time is another fundamental component of investment analysis. Always

It is necessary to take into account the period during which the money will be kept.
invested in the market, before knowing the risk that exists and deciding whether it is or not
convenient.

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Before being in a position to calculate the risk and the expected return of
For an investment, it is essential to know how long it will be held.
The same happens when one wants to know if the actual profit is what was expected. No
We must forget that investments are not static and that income and expenses
they vary depending on the period in which they are measured.

Since financial markets are not stable, the time that remains
an investment is very important for the outcome.

B. Time and profits

Time, like risk, has a more or less direct relationship with the
profit. Many expert investors believe that, the more time
the longer an investment lasts, the greater the potential benefits from it, and
vice versa.

The above happens because markets tend to show behaviors

cyclical, which expert investors and specialized institutions know
take advantage in favor of the investment. For example, if an investment has been
determined as high risk, a long period in it can increase the risk
What the investor has to lose money. When the exposure period to a
The risk is high, increasing the likelihood of what is feared happening.

C. How to face risk in investment decisions?

When we have an amount of money, we rarely think about the

possibility of investing in instruments that we do not know, due to the uncertainty that
this concept generates for us. Most of the time, we think that investments
they are made only by entrepreneurs or financial experts. However,
there are numerous options available in the market that provide the possibility to the
small investors to obtain attractive returns on their money.

The second concern that comes to our mind is risk. We know that
all investment options carry a certain degree of uncertainty,
that increases as the returns they offer are greater. It is in this
, where most investors stop. The fear of taking risks
A certain amount of money prevents them from being able to grow that wealth.

Next, we highlight some considerations that will help you face the
fear of investing

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It represents greater benefit to invest that money than to simply keep it.
in a debit account.

Investment options have different levels of risk depending on the

instrument that can be managed. That is to say, we can choose one with low risk.
that, however, yields us more return than spending it or having it without
to work.

With the help of a financial advisor, we can invest a part of our

capital in a medium or high-risk investment. The specialist
will be in charge of obtaining the greatest benefits and we will not have to
to worry about being experts in financial market behavior.

In current times, facing risk is almost indispensable, considering

that certain money reserves are necessary to face emergencies,
take advantage of opportunities or to have a dignified retirement. It should be noted that
there are investment options that allow us to access our funds
every day.

PRACTICAL CASES

1.) EXCHANGE RATE RISK

A businessman has sold goods worth 11,000 euros to an American company.

in dollars and has issued an invoice for the value of 10,000 dollars as at the time
when it was done, the dollar was at 1.10 euros per dollar. If by the time of collection
American company, it is going to send 10,000 dollars which have decreased in the market.
It could be the case that the exchange rate is now 1 dollar for euro, with which the
the businessman would receive his 10,000 dollars which would now only be equivalent to 10,000
euros.

An investment project of S/ 140,500 is financed in the following way: 40%

contribution from partners and the balance through a bank loan; the nominal passive rate is

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15% with monthly compounding; the nominal active rate is 38% with compounding
quarterly. The projected net cash flows of that project are:

35400

FNC2 = 49500

84200

FNC4 = 154000

Determine if the project is profitable.

Solution:

The first thing we need to do is find the cost of capital, but since the rates
they are in nominal terms, the first thing we have to do is capitalize them according to
the established conditions:

0.15
(1+ )
12
Effective passive rate = ¿ -1)*100 = 16.1%
¿
¿

0.38
(1+ )
4
Effective interest rate = ¿ -1)*100 = 43.8%
¿
¿

Inversión: 140500

Partners: 40% (140500) = 56200

Bank: 60% (140500) = 84300

cc = 56200(16.1%) + 84300(43.8%) / 140500

cc = 0.327

cc = 32.7%

At the business level, money must be productive, for this reason, resources of
those who promote an investment must also have a return, then
when these investors decide to invest, they lose for example the interest that they

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a bank can grant for its savings, for this reason when calculating the cost of
capital, the passive rate is applied to the partners' contributions as their financial cost (for the
opportunity cost.

Having the cost of capital and the projected net cash flows, we proceed to determine the
value of NPV:

35400 49500 84200 154000

VAN (1.327)1 +
(1.327)2 +
(1.327)3 +
(1.327)4 -140500

-16.7

VAN = - 16.7

Considering that the project yields a NPV of -16.7, we conclude that no

it is a profitable project, if it is executed or launched it will result in losses, therefore
it must be rejected.

FINANCIAL ANALYSIS I