Understanding Financial Risks in 2020
Translated by
ScribdTranslationsUnderstanding Financial Risks in 2020
Translated by
ScribdTranslationsMinistry of Higher Education and Scientific Research
General Directorate of Technological Studies
Higher Institute of Technological Studies of Bizerte
Financial risk
Academic Year: 2019-2020
Table of contents
Chapter 1: Financial Risks………………………………………………………………………1
1. Definition of risk………………………………………………………………………………...1
2. The different types of financial risk.................................................................1
2.1. Thecounterparty risk....................................................2
2.2. Theinterest rate risk………………………………………………………………………2
2.3. Theexchange rate risk……………………………………………………………………2
2.4. Theliquidity risk…………………………………………………………………..2
2.5. Theweather risk………………………………………………………………………..3
2.6. Thecountry risk...
2.7. Theoperational risk.................................................3
2.8. The risk of bankruptcy……………………………………………………………………4
Chapter 2: Risk Management .............................................................5
1. Definition ................................................................................. 5
2. Methodology against risks....................................................6
Conclusion.................................................7
Chapter 1: The
financial risks
1. Definition of financial risk
The concept of risk in finance is very close to that of
of uncertainty. A financial risk is ariskfrom
losing money as a result of aoperation
financial(on afinancial asset) or to an operation
economic with a financial impact (by
example a sale atcreditor in foreign currencies).
Notably, we distinguish therisks
economic(policies, natural, inflation...) that
threatening the flows related to securities and are part of the world
economic, and thefinancial risksliquidity
change, rates...) that do not directly relate to these
flows and are specific to the financial sphere. Whatever
Whatever its nature, every risk translates into a fluctuation.
of the value of thefinancial titleThis is indeed what
distinguishes pure accounting, which is solely concerned with
ofrate of return, and finance, which integrates the
notion of risk to determine value.
2. The different types of financial risks
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2.1. Thecounterparty risk
It is a risk that the company faces when its partners become unreliable.
temporary or permanent). This is, for example, the case when a partner
the company's contractor fails or refuses to meet its commitments (deliver goods)
products, make a payment, repay a debt...
In the case of a bank, this risk materializes through the inability of its clients to repay.
the loans taken out, or by the default of another banking institution with
which she has ongoing operations.
2.2. Theinterest rate riskof interest
This is a risk that casts a large degree of uncertainty on the outcomes of
the company. We will therefore mention, in particular: The risk of loss-borrowing, it is the risk that
Loan rates are rising in an unfavorable direction. For example, if you borrow at
a variable rate, you automatically run an interest rate risk (in case of an increase of
rate), since you will have to pay more if the rate increases and if the rate decreases you will pay less. And
Conversely, if you are a lender, the risk you face arises in the event of a decline in
rate, since you will automatically lose income and if the rate increases it will be a gain
of income
Example: In the case of a banking institution, we will mainly mention the risk involved.
in the event that market rates evolve in a direction leading to a revaluation cost
(deposits exceeding the gains resulting from the interest of the loans granted).
2.3. Theexchange rate risk
It is the risk associated with the fluctuations of currency exchange rates among themselves. Substantially related risk.
to the factor of time.
2.4. Theliquidity risk
It is the risk associated with the ease of buying or selling an asset. If a market is not liquid,
you might not find a buyer when you want one or not find any
seller when you absolutely need it. It is a risk related to the nature of the underlying asset.
(of the merchandise) but also to the credibility of the buyer-seller.
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Indeed, it is easy to buy or sell a common product to a counterpart of
confiance, mais plus difficile avec un produit très spécialisé. C'est la liquidité de ce produit.
Furthermore, if the buyer/seller is not credible, the counterparty risk for potential
suppliers/customers discourage them from doing business. The buyer/seller is at risk.
supply: at risk of "liquidity. »
Example: For a bank, it is the risk of being unable to cope
to a massive withdrawal of deposits by clients. If this risk is likely to spread from
close to close between the banksdomino effect), especially due to either
the drying up of interbank funding, either due to psychological contagions
among depositors, we talk aboutsystemic risk;
2.5. Theweather risk
It is the risk of potential loss of revenue or profit due to variations in the
weather. It concerns the four major climatic families which are temperature,
precipitation, sunshine, and wind. The weather risk only concerns the variations
ordinary weather conditions. It concerns the potential impact on a company's performance,
of a weather anomaly, that is to say the fluctuation around its average value.
2.6. Thecountry risk
In the strict sense, country risk corresponds to the probability that a country does not ensure the service of
toouter thisOn the other hand, if acountryis experiencing a very serious crisiswar, revolution,
bankruptcies in cascade, etc.) even the "companies oftrust, despite their credibility,
will find themselves in difficulty. It is a counterparty risk related to the environment of the
counterpart;
2.7. Theoperational risk
Operational risk for financial institutions (banking and insurance) is the risk
of direct or indirect losses due to a mismatch or a failure of the procedures
from the establishment (analysis or control absent or incomplete, unsecured procedure), from its
personnel (error, malice and fraud), internal systems (computer failure,...)
or to external risks (flooding, fire,...).
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2.8. The risk of bankruptcy
Also known as 'failure risk', it is a risk that questions health.
monetary/financial structure of the concerned entity. The risk of bankruptcy indeed invokes
the balance and solidity of the company's financial structures, naturally assessing its
solvency, its liquidity, as well as its ability to face other risks of the same nature.
However, at this stage, it is essential to establish an indispensable distinction between the notion of
immediate solvency and that of overall solvency. The former represents the ability to
pay its debts at the moment they become due. The second - considered in the longer term
term - it refers to the holding of an asset whose value/amount exceeds that of the debts.
The solution to manage this type of risk lies, first and foremost, in the need for evaluation.
the masses of the balance sheet and their structure. This is also known as balance sheet analysis.
This study is generally to be completed by an analysis and interpretation of the evolution
the balance sheets, as well as the new jobs and new resources listed in
the funding table.
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Chapter 2: Management
of risks
1. Definition of risk management
Risk management, or management of
risk is the discipline that focuses on identifying,
evaluate and prioritize therisksrelated to activities
of an organization, whatever the nature or
the origin of these risks, in order to address them
methodically in a coordinated manner and
economic, in order to reduce and control the
probability of feared events, and reduce
the potential impact of these events.
In this regard, it is a component of thebusiness strategywhich aims to reduce the
probability of failure or ofuncertaintyof all the factors that can affect his project
business. Continuous management of a company's risk grid requires vision and
vigilance of the leader and his advisors and executives, to readjust it to the realities on the ground and
regulatory systems that apply to it.
In large companies, there are specialized teams led by a
risk manager. It is therefore intended toto managetherisksof the company
who uses it. Medium-sized companies are still little concerned about management of
risks. According to a study by the auditing firm Mazars, which surveyed about 200 companies
showing revenues from 100 million to several billion euros, the risks that
The ones that worry them the most are those that can lead to a penalty from the client, followed by the risks.
techniques or operational
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2. Methodology Against Risks
Plan the risk management
Define and describe the modalities and methods of risk management (frequency of reviews of
risks, roles and responsibilities, methods of developing responses...
Identify the risks
Identify and document their characteristics using a risk grid or a tool such as
whatPRIMAVERA Risk Analysis
Implement qualitative risk analysis
Categorize and prioritize risks for future actions. The prioritization of priorities.
is made based on their likelihood of occurrence and their impact
Implement quantitative risk analysis
Evaluate the risks numerically to estimate the impacts and effects on the project.
Planning responses to risks
Establish responses and action plans to mitigate risks
Monitor and control risks
Update the risk list and reevaluate them. Action plans are monitored and managed in
function of the evolution of risks. A communication on the risk management plan is
carried out and its effectiveness is assessed.
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Conclusion
We walk anesthetized among the risks we create. From time to time, a
accident shakes us from our stupor, and we take a glance into the abyss
Ivar Ekeland
Ultimately, in large companies, there are specialized teams at the top.
of which a risk manager or Risk Manager works. Their purpose is therefore to
manage the company's risks.
The role of the specialist is to support the entrepreneur (analyze needs, identification
risks, scenario study, analysis of different strategies, market analysis
financiers) to eliminate all risks.
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