The assertion that any economic activity is fraught with risk is not in doubt for any entrepreneur.
When engaging in production, trade or the provision of services, the leaders of companies and firms are guided by a market system that dictates peculiar laws, rules, the concept of norms and competition. With full certainty and confidence, it is simply impossible to calculate the functioning of economic systems.
The Importance of Proper Risk Management
The process of making managerial decisions of various sizes (from everyday local importance to strategic and vital for the organization) is influenced by a large number of different factors and conditions. Uncertainty, which is expressed in the lack of information, data, as well as in the influence of the randomness factor, is likely to predict the outcome of a situation.
A kind of economic uncertainty is risk. This phenomenon is inherent in most areas of human activity. Today, employees who are able to research, predict and analyze risks are considered extremely important for the successful functioning of the enterprise. The volume of profit, competitiveness and the very survival of the company in many respects depends on the ability of its managers to predict the consequences of this or that action.
Analyze market financial risks are trusted by specialists who have sufficient experience and qualifications. The task of such a manager is to protect the assets and profits of the company from losses incurred as a result of changes and fluctuations in interest rates, foreign exchange rates and other economic and financial phenomena.
What is risk: concept, characteristic
Risk is the situation associated with the existence of a certain choice between several proposed alternatives. The onset of a risk-containing event entails both a positive and a negative result.
In other words, risk is the possibility of success or failure. This concept should be distinguished from uncertainty, since risk can be assessed and its impact can be measured.
Signs of a risk situation:
- There is uncertainty.
- It is possible to choose an alternative option (one of them is the refusal to choose).
- You can evaluate existing alternatives.
The most important risk feature that allows the manager to take action in time to reduce the negative impact of individual factors is probability. This term means a mathematical assessment of the situation. The probability reflects the calculation of the frequency of occurrence of a particular result. Such an assessment can be performed only if there is sufficient statistical information (data, indicators, expert estimates and forecasts).
Market risk: features, types and specifics
A situation in which the characteristics of the economic condition of an object due to market factors may not correspond to the expectations of decision makers is what constitutes market risk.
Such situations differ from other types of banking risk in that they are directly affected by market conditions. The types of market include interest risk, as well as stock and currency.
Risk for various types of organizations
The impact of risk-containing situations on the activities of any enterprise is enormous, so ignoring them or not thorough enough research can lead to losses and even collapse of the company. Market risk is a characteristic of the most important economic markets, for which a change in interest rates is of great importance. This is a market for debt securities, stocks, currencies, goods.
This category of risks reflects the possibility of losses (losses of finances) of credit organizations due to the fact that the price of financial instruments on the market has changed or exchange rates fluctuate. Also, this risk category reflects the possibility of a profit or loss of a trading organization in case of price changes.
For banks, interest rate risk becomes the most significant, as it directly affects the final result of operations. It is expressed in the possibility of increasing or decreasing the value of the assets of a banking organization due to fluctuations in interest rates on deposits and loans.
The value of risk for investors
When assessing the economic efficiency of future investments, each investor is interested in obtaining objective and reliable data on the degree of risk of a particular project.
He has a certain expected range of return on the securities portfolio, and the possibility that the actual profit will go beyond the limits of this interval is a market risk.
That is, it is the existence of the probability of a loss, loss or shortfall in profit. Losses associated with the implementation of economic activity are material, labor and financial. Market financial risks have their own gradation, according to which the most highly profitable investment options become, as a rule, extremely risky. Sometimes so much so that investors decide not to do business with them, since "the game is not worth the candle."
Why do risky situations arise?
Often, external and internal causes take part in the formation of risk situations.
Internal causes of market risk are:
- Deliberate opposition. For example, the acquisition or sale of a certain category of financial instruments.
- Wrong actions of managers in making managerial decisions. This may be the acquisition or sale of stocks, bonds, currencies, as well as errors in the number and duration of these manipulations.
External causes forming risky situations are considered to be:
- Adverse change in the value of financial instruments due to events occurring with the issuer and general market conditions (affects stock risk).
- Fluctuations in precious metals prices.
- The use of a large number of specific financial instruments (bonds, loans, mortgages) that may not be repaid on time.
- Dramatically changing exchange rates.
- Cases when customers and counterparties do not fulfill the terms of the contract.
What does “market risk assessment” mean?
In order to protect the company from the unpredictable influence of risk-containing situations, market risk is assessed and analyzed.
The main objective of these actions is to maintain the risk assumed by the company within the framework that was taken into account when setting strategic objectives. This is necessary to preserve assets and capital, as well as to reduce or eliminate losses.
Analyze all types of risks that are relevant to the activities of the enterprise (currency, commodity risk and others).
Stages of Market Risk Management
After determining the goals, principles and methods of risk management, specialists proceed to the following actions:
- Identify market risk.
- Estimate the degree of its influence and the level of probability.
- Monitor market risk.
- Take measures aimed at controlling and minimizing risk.
The main problem of specialists involved in risk assessment and management is the lack of any universal recipes. Each situation and question is unique and require an individual approach. Therefore, along with qualifications, experience and professionalism, managers need such qualities as intuition and flexibility of thinking.