Financial risk

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Financial risk is all sorts of risks associated with finance, usually in comparison with non-financial risks, such as operational risks. Types of financial risk is the risk such as exchange rates, interest rate risk and liquidity risk.

Liquidity risk is the risk that arise if a party can not pay the obligations coming due in cash. Although these parties have sufficient assets to pay off obligations valued, but when these assets can not be converted into cash immediately, then the party is said to be illiquid.

This can happen if the debtor can not sell his property because there was no other parties interested in the market to buy. This is different to a drastic decline in asset prices, because in the case of declining prices, the market thinks that the asset is of no value. The lack of interested parties to exchange (purchase) of assets probably just caused by the difficulty to reconcile both sides. Therefore, liquidity risk is usually more likely to occur in newly emerging markets or small volume.

Liquidity risk is a financial risk because of the uncertainty of liquidity. An institution may be less liquidity if its credit rating fell, expenditure had an unexpected cash, or other events that cause the other party to avoid the transaction or provide loans to these institutions. A company also may be exposed to liquidity risk if markets decline followed liquidity.



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Exchange rate risk or currency risk is a form of risk that arise due to changes in exchange rates of a currency against other currencies. A company or investors who have assets or business operations across the country will receive this risk if it does not apply hedge (hedging).

Exchange rate risks associated with foreign currency instruments important to note in foreign investment. These risks arise because of differences in monetary policy and real productivity growth, which will result in differences in the rate of inflation.

Faced by lenders to consumers

! Main article for this section are: Consumer credit risk

Most lenders use their credit worthiness assessment of each to rank the risk of consumers and then apply to their business strategy. With products such as unsecured personal loans or mortgages, lenders charge high interest rates on high-risk customers and vice versa. On loan products such as credit cards and overdrafts, risk is controlled through setting of credit limits carefully. Some products also require security, usually in the form of property.