How is risk management connected to financial trading ?

How is risk management connected to financial trading ?
Financial risks existed since the beginning of trade relations. In time, however, the extent to which they were identified, measured and controlled varied greatly.

Financial losses incurred by internationally renowned companies, due to faulty risk management activities and especially powerful media coverage of the incident, led managers to the awareness regarding the crucial importance of risk management.

This has caused many companies to reconsider their position on treasury department, which is absolutely mandatory in the organizational structure of a company, regardless of its object of activity.

Thus, the treasury department has a very important role in the success of the entire company, in a well-controlled way. Also the activity of risk management has developed a lot, means of identifying, quantifying and controlling financial risks are now available for any company wishing to improve their financial risk management practice.

A comprehensive range of tools has been developed and yet, others are created daily with the help of financial engineering, which makes it possible for almost any risk to be covered.

It can be said that companies no longer have any excuse for not applying this activity effectively. It should be also mentioned that the failure of a hedging strategy may be a decision in itself, but is not necessarily the best. Such a decision must be justified.

While risk management tools facilitate risk reduction, they become means of creating risks at the same time. For risk management activities of a company to run efficiently, the tools and techniques used must be well understood and the circumstances in which they are used have to be controlled very strictly.

Internal control is absolutely essential to ensure that the company’s treasury business operates correctly and in line with the overall strategy of the company.

Risk management involves understanding, identifying and assessing all types of risk. At the level of any company or financial institution it is only necessary to define risk management policy followed by the determination of risk limits, namely the establishment and implementation of management and control procedures of these risks.

In the opinion of many experts, risk involves an exposure to a particular change or possibility of adverse deviations from what is anticipated. In stock terms, risk is the probability that a transaction may not get the expected profit or even, register a loss.

Risk is an integral part of any activity, being found in many daily financial operations. Unexpected changes regarding the interest rate, changes in the exchange rate or price of a product does not only affect the financial results of a company, but can cause even bankruptcy. In fact, the nature of financial decisions involves uncertainty. Financial decisions are made based on expected cash flows of future contracts that are by nature, uncertain.

The risk is thus an inherent financial decision. It is not surprising that an important function of the financial system is to manage the interest rate risk associated with the evolution of stock prices, exchange rates or prices of certain goods. Capital market offers numerous tools, both for risk diversification (eliminating certain risks) and for managing those risks that cannot be diversified by dividing them between several companies.

The point is that risks represent sources of comparative advantage if properly optimized by management. But just how can anyone properly optimize risks in any financial trading activity?

The answer is simple: through education, meaning learning and studying risk management techniques.

Site Footer