Thakur College Of Science & Commerce

TOPIC : TYPES OF RISKS

WHAT IS RISK ?
Risk is defined as volatility of actual returns from an investment

with respect to expected returns.

Risk is the chance that an investments actual return will be

different than expected.

Risk includes the possibility of losing some or all of the original

investment.
Different versions of risk are usually measured by calculating the

standard deviation or the historical returns or average returns of a specific investment.

 A high standard deviation indicates a high degree of risk.

Financial Risks
Financial risks is a common term for every risk associated with

all kinds of financial assets.

Financial risk refers to the risk of bankruptcy arising from the

possibility of a firm not being able to repay its debt on time.

Higher the debt-equity ratio of a firm higher the financial risk

faced by it .
Liquidity risk and wrong capital structure are the prime reasons

for financial risk.

 A company with low proportion of debt has lower level of

financial risk.
A company which is unlevered has no financial risk.

How does financial risk arise ?

Financial risks arises through numerous transactions of a

financial nature , including sales and purchases investment and loans and other business activities.
It can arise as a result of legal transactions, new projects, mergers

and acquisition, debt financing or through activities of management , stakeholders, competitors, foreign governments or weather.
Financial fluctuations may make it more difficult to plan and

budget , price goods and services and allocate capital.

Main sources of financial risk

Financial risks arising from an organizations exposure to

changes in market places, such as interest rates, exchange rates and commodity prices.
Financial risks arising from the dealings of, and

transactions with each other organizations such as vendors, customers and counterparties in derivative transactions.
Financial risks resulting from internal actions or failures of

the organizations , particularly people processes and systems.

Types of financial risks

INTEREST RATE RISK

EXCHANGE RISK

MARKETABILITY RISK

PERSONNEL RISK

ENVIORNMENTAL RISK

PRODUCTION RISK

INTEREST RATE RISK :

Interest rate risks is the risk of an adverse rate movements

on a firms profit or balance sheet .

It can also be defined as the risk arising due to sensitivity

of the interest income/expenditure or values of assets/ liabilities to the interest rate fluctuations.

EXCHANGE RISK :
The volatility in the exchange rates will have a direct bearing on

the values of the assets and liabilities which are denominated in foreign currencies

 While appreciation of home currency , decreases the value of an

asset and liabilities in terms of home currency.

 While depreciation of home currency will increase the value of

assets and liabilities.

MARKETABILITY RISK:
This is the risk of the assets of a firm not being readily

marketable.
Marketing risk can also take place because of selling at lower

than expected prices due to existence of competition, change in fashion or taste of consumers leading to obsolescence of products, political instability resulting in loss of exports, etc

PERSONNEL RISK:
By and large every company needs personnel to operate. The risk is such as resignation/ death/ sickness of the employee.

All these affect the performance of the company.

Another source could be frauds committed by the staff.

ENVIORNMENTAL RISK :
With the awareness created in public minds about the damages

caused to the environment by industrial concerns the company runs the risk of heavy fines ,closure ,government orders to shift the premises .

PRODUCTION RISK:
The production may be disrupted due to floods,etc. The firm may not be able to produce the budgeted quantity at the

budgeted price.
The plant and machinery may not work efficiently affecting

production.
Raw materials may not be available in short-supply. These are few risks due to production irregularities.

NON- FINANCIAL RISK:

Defining a non financial risk should be on comparative basis.

Non-monetary would refer to anything.

A risk in anything that if it occurs, the resultant consequences

thereof will be to the determinant of the benefactor.

Therefore a non financial risk is that which if it happens there

wont be any monetary consequence.

TYPES OF NON FINANCIAL RISK

INTERNAL RISK

EXTERNAL RISK

INTERNAL BUSINESS RISK :

The internal business risk refers to the degree of operational

efficiency the management has with the unanticipated future.

The systems adopted the decision making abilities, the ability of

the management to visualize the future will all contribute to the internal business risk.
To great extent it is a controllable factor.

The risk losses that may arise due to personnel can also be

classified here.

EXTERNAL BUSINESS RISK :

the external business risk is the result of external environment in

which the business is in existence.

It emanates from factors which are not within the control of the

company.

Group members
Bhumika verma : 7923

Bijal patel

: 7924 Neha sangwan : 7925 Anoli adhia : 7926 Anusha shetty : 7927

Thank You