What is Financial Risk Management and Why Study It?
Every business, regardless of size, deals with some degree of risk. There are several variables to consider for every decision involving finance, and a certain amount of risk can never be avoided. But it can certainly be mitigated. As such, companies are increasingly looking to specialists in the field for expert evaluations to help make decisions that directly impact a business’ revenue. Read more about financial risk management and why it’s a promising career…
What is financial risk management?
Every investment comes with potential risks. In fact, there is no profit without risk. Contrary to what we are used to, risks in finance can be positive as well as negative. In short, a risk is any deviation from the expected outcome. Risk management is the necessary step of evaluating possible outcomes, analyzing potential gains and losses, and deciding on what action should be taken (or not) given the conclusions from the evaluation.
Why study it?
A 2019 report by Accenture indicated that new investment risks are emerging with unprecedented speed. The top three new challenges appointed by specialists were disruptive technology, data breaches, and operational risks. Moreover, climate change has become a factor to be considered as property, infrastructure, and land damage pose new challenges.
Sustainable economy
While some may believe financial risk pertains only to high-ranking CEOs and investors, it’s essential to understand how it affects everyone. A country’s population is entirely interconnected through its financial system, and poor financial decisions can lead to an unreliable market and a declining economy. Having a reliable financial market means a stable and sustainable economy, in which everyone will benefit from better living conditions.
Solve climate change risks
As mentioned, the reality of climate change can affect businesses and investments in many ways. Besides the physical risks of property damage, business disruption, and the need for relocation, factors like technological transition and policy changes need to be considered in a risk analysis.
Cybersecurity
Cyber risk is the number one threat to the global financial system, says U.S. Federal Reserve Chairman Jerome Powell. Financial institutions are prime targets for cyberattacks, and sector leaders have appointed cyber security to be at the top of their priorities, rising above every other potential risk. Risk managers need to develop strategies to effectively deal with the cyber threat in a world that relies on technology to keep the global economy afloat.
Cryptocurrencies
The recent boom in cryptocurrency assets can directly affect the overall financial system. A report by the Financial Stability Board has highlighted vulnerabilities in the crypto market, such as linkages with the regulated financial system, liquidity mismatch, and credit and operational risks. Blockchain intelligence companies have invested in risk management technology, but this remains a sector that will need to be followed closely as it further develops.
Geopolitics
Not many companies fully consider how geopolitics involves a variety of financial risks. Access to natural resources, proximity to countries in conflict, limits on foreign relations, corruption, and local culture are just some factors to consider in a risk analysis. Each location provides a particular financial scenario, and only by fully understanding this context can a business use it to its advantage.
Work opportunities
A specialized professional in financial risk management is necessary for every business. Many companies hire consultants or teams to anticipate exposure, quantify the risk, and plan mitigation strategies. As a risk specialist, you can work in sales, trading, marketing, banking, and many other sectors, while benefiting from the increasing demand for qualified professionals in the field.
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