Theories Risk Management, Types Risk, Implications Portfolio

¶ … theories risk management, types risk, implications portfolio theory.

As the risk factors have diversified and as new types of risks have appeared, the theories of risk management have also multiplied, with new theories to address new areas of concerns and new threats. For example, when it comes to financial risk (including a large number of related risks, such as operational risk or currency risks), the company comes under the threat of fluctuations from the financial market, whether the currency market, the interest rate market, the commodity market etc.

With this in mind, theories like Value at Risk aim to measure the maximum loss that a portfolio can undertake during a certain period of time, with a certain probability. Subsequently, such risk management approaches are then used in capital requirements, such as Basel II. Probability theories are also considered in risk management, to the degree to which the probability of an event happening can be determined.

The types of risks, if referring to the enterprise and financial company, are easy to identify depending on the position of the company and the activity the company is involved in. Market risk is a type of risk that exposes the company to threats from the market, as prices fluctuate during a certain period of time. Market risk is part of a wider category of risks, known as financial risks.

These include credit risk, interest rate risk, equity risk or currency risk. Each of these show the exposure of the company to a particular type of threat (currency, interest rate) and depend on the degree to which the company is involved in operations that have such risks. For example, if the company is operating only nationally, it is not exposed to currency risk. At the same time, if it is not operating on outside debt and only on equity, its credit risk is minimized.

For a company, some of the other important categories of risks are operational and liquidity risks. The operational risk is usually a group of risks that includes political and legal risks. It is generally associated with risks arising from the activity of people, either in the country or in the organization, and the threat their actions may have for the company.

Liquidity risk is related to the nature of a certain asset and its capacity with which it can be transformed into cash (or other financial instruments that are similarly liquid). If the company has a high liquidity risk, it may be in a situation where it will not be able to cover its short-term liabilities, based on existing cash in the organization.