Managing Financial Risks
In today's world, managing finances is a vital skill. Everyone
faces financial risks, and understanding these risks is essential
for protecting your financial well-being.
by nurul atiqah
LEARNING OBJECTIVE : 9.FL3.05 Identify different types of financial risks
and understand strategies to manage financial risks.
Key Vocab : Liquidity, market risk
Types of Financial Risks
Market Risk Credit Risk Liquidity Risk Operational Risk
Losses due to changes The risk that a Inability to quickly sell Losses caused by
in market conditions, borrower might not an asset for its full failures in internal
such as interest rates, repay a loan. This can market value. If you processes, systems, or
inflation, or stock impact banks, need to sell your car people. An example is
prices. Imagine losing businesses, and quickly, you might a company losing data
money if a stock you individuals who lend have to accept a lower due to a computer
invest in suddenly money. price. system malfunction.
drops.
Managing Financial Risks: Insurance
Insurance Homeowners Insurance Auto Insurance Health Insurance
Protects against specific Covers damage to your Covers damage to your car Covers medical expenses
financial risks, like health home and possessions due and medical expenses in for illnesses, injuries, and
problems, property to fire, theft, or natural case of an accident. preventive care.
damage, or unforeseen disasters.
events. This helps you
avoid substantial losses.
Emergency Funds: Your
Financial Safety Net
1 Emergency Funds 2 Importance of
Emergency Funds
A crucial part of
managing financial Provides a financial
risks. It's a reserve of cushion to cover
cash specifically set unexpected medical
aside for unexpected bills, job loss, car
expenses or repairs, or other
emergencies. unforeseen
circumstances.
3 Building an Emergency Fund
Start small, save a little each month, and gradually build
up your emergency fund to cover 3 to 6 months of
expenses.
Hedging: Mitigating
Potential Losses
Hedging
Using financial instruments to reduce the risk of loss.
It's like buying an insurance policy against a specific
risk.
Futures Contracts
Agreements to buy or sell a specific asset at a
predetermined price in the future.
Options
Give the buyer the right, but not the obligation, to
buy or sell an asset at a certain price within a specific
time frame.
Diversification: Spreading Your Risk
Diversification
Spreading investments across various assets to reduce the impact of losses in one
1
area. It's like putting your eggs in multiple baskets.
Stock Market
2
Invest in stocks of different companies across various industries.
Bonds
3 Invest in bonds issued by corporations or governments, providing a
fixed income stream.
Real Estate
4 Invest in rental properties or commercial real estate,
potentially generating rental income.
Managing Risks: A Bakery Example
Cost Management
Diversification and
Negotiating with suppliers
Business Interruption Innovation
for discounts or seeking
Bakery Challenges Insurance
Offering new products or alternative, more
New competition and rising Covers losses due to expanding to online sales affordable ingredients.
ingredient costs present unforeseen events that to attract new customers
financial risks. disrupt operations, like a and increase revenue.
fire or natural disaster.
Key Takeaways
Understanding financial risks is essential. Insurance,
emergency funds, hedging, and diversification are effective
strategies for managing these risks. By taking proactive steps
to minimize financial risks, you can build a secure and
prosperous financial future.
Homework
Worksheet
Risk on
Due date 13/2/25