Magazine article Strategic Finance

An Overview of Financial Risk Management

Magazine article Strategic Finance

An Overview of Financial Risk Management

Article excerpt

In Essentials of Financial Risk Management, author Karen A. Horcher defines financial risk management as "a process to deal with the uncertainties resulting from financial markets." Horcher summarizes the process of financial risk management as:

* "Identify and prioritize key financial risks.

* Determine an appropriate level of risk tolerance.

* Implement risk management strategy in

accordance with policy. * Measure, report, monitor, and refine as needed."

Horcher methodically addresses the various topics that fall under the umbrella of financial markets, including interest rate risks, foreign exchange risk, credit risk, commodity risk, and operational risk. Her book isn't intended to be a technical treatise; rather, it's a high-level overview of the various financial risk areas designed to provide a fundamental framework of understanding.

Two chapters that I found particularly interesting covered operational risk and the policy and hedging of the risk management framework. In the chapter on operational risk, Horcher takes the topics from prior chapters and describes how they fit into the overall financial processes. For example, she discusses internal control, cash management, conflicts of interests, and management oversight. It's important to use these tools to monitor not only the process of financial risk management but its effectiveness as well. Establishing appropriate checks and controls that report on activity compared to plans and market helps to provide feedback on whether the financial tools are meeting the organization's objectives. …

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