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Defining Income Risk in Finance

Risk refers to the potential for future returns to vary from expected returns. All organizations face various risks that can impact earnings over the short and long term. Financial institutions like banks face many risks as they help mobilize savings and provide credit. Some key risks for financial institutions come from economic policies, political and social issues, technology, prices, competition, and corporate financial performance. Effective risk management is important for wealth maximization and prudent financial management. It involves procedures for risk assessment, quantification, and minimization. The benefits of risk management include bringing order to the risk process, enabling risk valuation, improving risk awareness, and reducing costs.

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Omkar Pandey
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21 views18 pages

Defining Income Risk in Finance

Risk refers to the potential for future returns to vary from expected returns. All organizations face various risks that can impact earnings over the short and long term. Financial institutions like banks face many risks as they help mobilize savings and provide credit. Some key risks for financial institutions come from economic policies, political and social issues, technology, prices, competition, and corporate financial performance. Effective risk management is important for wealth maximization and prudent financial management. It involves procedures for risk assessment, quantification, and minimization. The benefits of risk management include bringing order to the risk process, enabling risk valuation, improving risk awareness, and reducing costs.

Uploaded by

Omkar Pandey
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Understanding Risk

Basics [Link]

Risk definition and Nature

Potential for future returns to vary from the expected returns Any event or possibility of an event which can impair/damage expected earnings/income /cash flow over the short /medium /long term horizon is called risk All kinds of organizations face risks of different kinds and have to learn to deal with and manage risks better to succeed.

Risks in Financial sector

Financial sector means banks, financial institutions, stock exchanges ,mutual funds, insurance companies , investment institutions etc Financial intermediaries help in mobilizing household/corporate savings and making them available to deficit units Since they help in credit creation by means of means of loans/advances ,they face many risks . In fact ,taking risk is the core of the most of the financial products/services offered by institutions

Activities of Financial institutions


Funds mobilization Funds deployment Funds transfer Risk transfer Transaction services Credit enhancement services

Sources of Risk
Technology Prices Market share

Sources of Risk

Competition

Productivity

Sources of Risk

Economic policies of governments and budget deficits/surpluses ,changes in money supply levels of inflation and interest rates ,capital formation Consumption and savings propensities and preferences of consumers resulting in certain patterns of international trade leading to trade surpluses in some economies and deficits in others.

Sources of risk
Political ,social, racial and ethnic issues that impact the availability /demand for a particular commodity/bullion resulting in upheavals /fluctuations in certain markets Technological factors Corporate financial performance and management as result of competition

Challenges of Modern Corporate


Wealth Maximization Risk Management consistent with risk preferences Prudent financial management Volatility control Diligent procedures and practices for risk management

Risks faced by Corporate sector

SEBI & Risk Management


Procedures for risk assessment and minimization The CEO and CFO certify the effectiveness of internal controls and initiate steps to rectify/reduce risks Quarterly details on risk exposures and steps taken to be informed to the Board

Benefits of risk management


Brings order and system to the risk quantification process Enables assigning value to estimated risk of loss Alerts on extreme risky situations Improves risk awareness Results in increased valuation and reduced costs

Risk Policy
Definition of risk management framework in the context of operating and economic environment Strategic ,business ,operational levels at which risk management procedures needs to be implemented Identification of risks and their effects Risk preferences of stakeholders

Risk Policy
Clarity in risk management procedures Identification of external and internal factors that limit application of risk management procedures /strategies Establishing ground rules Tools and techniques &tracking and reporting on risks and steps taken measurement of impact

Risk management approaches


Risk avoidance Loss control Diversification Risk transfer Risk retention Risk sharing

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