financial risk management

Topics: Finance, Corporate finance, Investment Pages: 5 (973 words) Published: July 16, 2014
Brief Introduction of Financial Risk Management

Huang Xuan

Financial risk management is an interdiscipline with various researching subfields including the studies of mathematical methods to maximum the profits, quantitative analysis of financial databases and investment decisions. In other words, it is aimed to bridge the gap between mathematical theories and practical financial analysing tools (Nawrocki 1999). It could also be defined as“Living with the possibility that future events may cause adverse effects” (Kloman 1999). Risk and profit are always an integral. The variety of risks including portfolio risk, credit risk and liquidity risk became a financial conundrum which equalled to a group of destructive nuclear bombs hidden in the monetary market. Consequently, the risk management represents the core competence in insurance and banking industries. With the innovation of IT technology, more advanced computer software has been introduced in financial area which results that the risk management has made impressive strides in last decade. As the academic field mature constantly, the abstract mathematical and statistic concepts reifies to accessible programs which could predict the trends of investment returns, for example, the expected earnings at the end of next week after buying certain amount of stock at next Monday (Chapman 1996, iv).

The origin of risk management could date back to the game theories introduced by two French mathematicians, Blaise Pascal and Pierre de Fermat. Hundreds year past, two professors, Fisher Black and Myron Scholes invented the “Black & Scholes Model” to give suggestions to reduce the risk in stock and option trade in 1973. However, the significance of this subject has been underscored after the global financial crash in the 2000s. During the period from 2007 to 2009, the world had suffered from the worst economic crisis since the Great Depression in the 1930s. Thousands of banks, funds and other financial institutes faced bankrupt and had been forced to close up by their supervisory authorities. To tide over difficulties, a great number of small financial organizations had to look for a larger and more powerful co-operators, for example, HSBC, Barclays and UBS, then merged with them (Lybeck 2011, ix). That was the trigger of stimulating the development of risk management. Financial industry started to hire more experts and employees in terms to enhance the analysing functions. Moreover, finding a practical approach to optimize the profits and control the risks at same time became a core issue of global financial conferences.

A wide range of people and organizations could be the beneficiaries of risk controlling. From a retired to the largest financial institution, all the society should think of ways to alleviate the effects of potential risk in marketing and trading. Basically, for detailed explanation, person and institutions could be divided into three groups to analyse due to different scale. The first group is the collection of individuals who focus on the personal finance management. The content of personal finance management is balancing the income and consumption, planning the pension, investing on financial products of low risk. Modern perspective on personal finance management emphasised the protection of property which includes dealing the unexpected events and enhancing the stability of personal wealth, for example, suffering a traffic accident or global financial crisis. The core of personal finance management is controlling the risk. The main part of second group consists of the saving banks or commercial banks. Those banks collected money from public deposit and invested on specific project which was also called loan. Over 50% potential risk of commercial banking activities located at credit risk. For instance, the enterprises who borrowed funds from bank refused or lost the capability to repay the loan. Other losses might happen in intentional .swindles and...
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