FINANCIAL AND OPERATING RISK

Made by: ZEESHAN AZHARMBA 3RD section: A

FINANCIAL RISK

• Definition

Financial risk is an umbrella term for multiple types of risk

associated with financing, including financial transactions

that include company loans in risk of default.

Risk is a term often used to imply downside risk, meaning

the uncertainty of a return and the potential for financial loss

• Type of Risk

• 1 Asset-backed risk

• 2 Credit risk

• 3 Foreign investment risk

• 4 Liquidity risk

• 5 Market risk

• 6 Operational risk

Asset backed risk

• Risk that the changes in one or more assets that support an

asset-backed security will significantly impact the value of the

supported security. Risks include interest rate, term

modification, and prepayment risk.

Credit risk

• risk associated with a borrower going into default (not making

payments as promised). Investor losses include lost principal

and interest, decreased cash flow, and increased collection

costs

• investment may directly or indirectly use or rely on repo

3 Foreign investment risk

• Risk of rapid and extreme changes in value due to: smaller markets; differing accounting, reporting, or auditing standards; nationalization, expropriation or confiscatory taxation; economic conflict; or political or diplomatic changes. Valuation, liquidity, and regulatory issues may also add to foreign investment risk

4 Liquidity risk

• This is the risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit)

• There are two types of liquidity risk

Asset liquidity: An asset cannot be sold due to lack of liquidity in the market

Funding liquidity: Risk that liabilities, Cannot be met when they fall due

5 Market risk

• The four standard market risk factors are equity risk, interest rate risk, currency risk, and commodity risk

Types of market risk

• Equity risk

• Interest risk

• Currency risk

• Commodity risk

6 Operational risk

• NEXT TOPIC

OPERATIONAL RISK

MADE BY : ZEESHAN AZHAR

CLASS : MBA 3RD

14072720-053

OPERATIONAL RISK

• Probability of loss due to changes in

demand, input costs, management,

operating leverage, prices, and other such

factors

• "The risk of loss resulting from inadequate

or failed internal processes, people and

systems or from external events."

TYPES OF OPERATIONAL RISK

•Country risk

•Legal risk

•Political risk

•Valuation risk

Country risk

• Country risk refers to the risk of investing or

lending in a country, arising from possible

changes in the business environment that may

adversely affect operating profits or the value of

assets in the country. For example, financial

factors such as currency controls, devaluation or

regulatory changes

• Legal risk • The cost and loss of income caused by legal

uncertainty, multiplied by possibility of the

individual event or legal environment as a whole.

Legislative risk

Contractual risk

Dispute risk

Non- contractual obligations

Political risk

• Political risk is a type of risk faced by investors,

corporations, and governments. It is a risk that

can be understood and managed with reasoned

foresight and investment

• There are two types

Micro level

Macro level

Valuation risk

• Valuation risk is the financial risk that an asset is

overvalued and is worth less than expected when

it matures or is sold. Factors contributing to

valuation risk can include incomplete data,

market instability, financial modeling

uncertainties and poor data analysis by the people

responsible for determining the value of the asset