Essay: What are the risks inherent to Financial Instruments and how to mitigate

them? 
Financial instruments involve a variety of risks and before taking an investment decision
it is important to become acquainted with the nature of the financial instrument in
question and the risks connected to it. The risks inherent to financial instruments are
credit risk, market risk, liquidity risk, operational risks and legal risks. Credit risk arises
when one fails to fulfill their obligations towards their counterparties. Market risk arises
due to the movement in prices of financial instrument. Liquidity risk arises out of an
inability to execute transactions. Operational risk arises out of operational failures such
as mismanagement or technical failures. Lastly, arises out of legal constraints such as
lawsuits. 
 
In order to mitigate the mentioned financial risks, we must first conduct a financial risk
assessment.  A financial risk assessment can help you identify the risk level specific to
your business, prioritize those risks, develop ways to avoid them and outline steps to
manage them should they happen. A financial risk assessment also helps you
understand your appetite for risk. To develop financial risk mitigation solutions, you will
need to identify and analyze financial risks, then create a proactive financial risk
management plan. By identifying financial risks, you can take a proactive stance in
protecting your business’s cash flow and improving performance. To identify financial
risk, start by carefully reviewing your corporate balance sheet or statement of financial
position. Once you have identified financial risk, you can begin analyzing each risk to
determine the likelihood of the risk occurring and its consequences. Once you analyze
your business’s financial risks, you can plan how to meet those challenges in cost-
effective ways. Select appropriate controls that can help you mitigate identified financial
risks or manage them effectively should they happen. Document the controls, identify
which controls should be applied to which risks, how they should be applied and when.