What are the different types of financial risks?
What are the different types of financial risks
1. **Market Risk**: Market risk arises due to fluctuations in the prices of financial instruments. For example, situations such as stock prices being affected by a general market decline are considered market risks.
2. **Credit Risk**: Credit risk is the risk that the lender will not be able to pay the debt of the borrower or institution on time. For example, when a company goes bankrupt, creditors may not be able to recover their debts from that company.
3. **Interest Rate Risk**: Interest rate risk arises due to changes in interest rates. Particularly fixed income instruments such as bonds may be affected by this risk. When interest rates rise, the value of fixed income investments may decline.
4. **Liquidity Risk**: Liquidity risk occurs when an asset or market experiences problems with the cost or timing of buying or selling transactions. For example, a stock market with low trading volume may have liquidity risk.
5. **Operational Risk**: Operational risk is the risk of suffering losses due to errors, negligence or system failures in an organization's internal processes or resulting from external factors. For example, a crash of a bank's computer systems could be an operational risk.
6. **Political Risk**: Political risk arises due to factors such as political decisions, legal regulations or political instability. For example, loss of investment value due to sudden tax increases or political instability in a country is considered political risk.
These types of risks are important factors to consider when investing in financial markets or doing business with financial institutions.
What is credit risk?
Credit risk is the risk that a borrower will not pay his debt or comply with his debt repayment plan. This refers to a situation where the lender is concerned that the borrower will not be able to repay the loan in accordance with the agreement or will not comply with the payment plan.
1. **Default Risk**: Default risk occurs when the borrower does not pay his debt. This means that the borrower becomes bankrupt or unable to pay his debts.
2. **Delay Risk**: Delay risk refers to the situation in which the borrower can pay his debt in the end, even if he cannot pay it on time. However, this delay may cause financial losses for the lender or affect cash flow.
3. **Abuse Risk**: Abuse risk occurs when the borrower misuses the debt or acts deliberately manipulative to avoid repaying the debt. For example, trying to get a loan with false documents or not paying the debt at all can be given as examples of the risk of abuse.
Credit risk is particularly important for financial institutions because credit risk determines the quality of loan portfolios and affects the institution's overall risk profile. To manage credit risk, financial institutions often use methods such as credit analysis, collateral requirements, credit scoring, and insurance.
Political risk refers to the risk that arises due to factors such as political decisions, legal regulations or political instability in a country and may have negative effects on investments. This risk includes the concern of investors or businesses that political changes or events that may occur in the country in which they operate may have the potential to harm their financial situation or projects.
Some examples of political risk are:
1. **Legal Changes**: Situations such as the government changing legal regulations in a country, rearranging tax policies or trade rules may create political risk. For example, unexpected tax increases or foreign trade restrictions in a country may increase political risk.
2. **Political Instability**: Political uncertainty or instability in a country can reduce investors' confidence and put investments at risk. For example, situations such as political conflicts, changes of government, or revolution can increase the risk of political instability.
3. **Expropriation Risk**: Political risk increases for foreign investors if the government in a country takes steps such as seizing or nationalizing the assets of foreign investors. This situation creates concern, especially in sectors with natural resources or foreign capital intensive sectors.
4. **War and Terrorism Risk**: Events such as war, civil conflict or terrorist attacks in a country can increase political risk. Such events can make it difficult for businesses to continue their operations or protect their investments.
Political risk is an important factor faced by international investments or multinational companies. Investors and businesses often use a variety of strategies to reduce or manage political risks, including political risk insurance, carefully analyzing the political and economic conditions of the investee country, and diversification.
