what is the advantages and disadvantages of business risk management
1. What are the advantages and disadvantages of financial risk management?
Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.
Financial risk includes various categories such as credit risk, market risk, liquidity risk, operation risk and reputation risk. These are risks that can ruin a company as well as harm investors' benefits. Finance theory prescribes that a firm should take on a project when it increases shareholder's value and to create value for shareholders using financial risk management. Thus, adopting financial risk management offers advantages associated to protection of companies and the shareholders. Of cause, many other negative effects brought by financial risk can be minimized.
To begin with, financial risk management reduces the probability of financial failure of firms. For example, market risk can bring uncertainty of future earnings resulting from changes in market conditions. If market situation becomes bad, firms finance may be seriously affected and greatly reduce investors' gain. However, with financial risk management which involves measurement of market sensitivities, analysis of cash flow and VaR measurement of loss, market's adverse influences to firm can be controlled. Shareholder will be protected and their probability of suffering huge loss can be diminished.
Of equal importance is that financial risk management increases job security and employment. Staff of a company is an essential stakeholder so that their security should also be concerned. Financial crisis always result in large-scale unemployment and job market instability. Take the financial downturn in Asia in 1997 as an example, the unemployment rate of Hong Kong was at an all-time peak 6%. This was resulted from the bankruptcy and collapse
Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them.
Financial risk includes various categories such as credit risk, market risk, liquidity risk, operation risk and reputation risk. These are risks that can ruin a company as well as harm investors' benefits. Finance theory prescribes that a firm should take on a project when it increases shareholder's value and to create value for shareholders using financial risk management. Thus, adopting financial risk management offers advantages associated to protection of companies and the shareholders. Of cause, many other negative effects brought by financial risk can be minimized.
To begin with, financial risk management reduces the probability of financial failure of firms. For example, market risk can bring uncertainty of future earnings resulting from changes in market conditions. If market situation becomes bad, firms finance may be seriously affected and greatly reduce investors' gain. However, with financial risk management which involves measurement of market sensitivities, analysis of cash flow and VaR measurement of loss, market's adverse influences to firm can be controlled. Shareholder will be protected and their probability of suffering huge loss can be diminished.
Of equal importance is that financial risk management increases job security and employment. Staff of a company is an essential stakeholder so that their security should also be concerned. Financial crisis always result in large-scale unemployment and job market instability. Take the financial downturn in Asia in 1997 as an example, the unemployment rate of Hong Kong was at an all-time peak 6%. This was resulted from the bankruptcy and collapse