PMCF8 MODULE 3 ASSIGNMENT: REVIEW QUESTIONS

A. Define and explain Financial Risk Management (FRM).

Financial Risk Management is the process of identifying risks, analyzing them and

making investment decisions based on either accepting, or mitigating them. These can be

quantitative or qualitative risks, and it is the job of a Finance manager to use the available

financial instruments to hedge a business against them. Financial risk management isn't just

about minimizing financial risks in the business; it's also about understanding what and how

much risk you're willing to take, how much you should avoid, and what you should do instead.

You must develop a strategy based on your risk assessment and evaluation.

B. Citer and briefly discuss the different types of financial risks.

There are numerous ways to classify a company's financial risks. It is divided into four

broad categories: market risk, credit risk, liquidity risk, and operational risk. First, the Market risk

which also known as Systematic Risk and the risk of losses on financial investments caused by

adverse price movements. Secondly, the Credit risk which risk of possibility of a loss resulting

from a borrower's failure to repay a loan or meet contractual obligations. Then, the Liquidity risk

refers to how a bank's inability to meet its obligations threatens its financial position or

existence. Lastly, the Operational risk is a business risk that arises out of day-to-day operations

and business activities due to various work-related hazards and uncertain conditions.

C. Identify and discuss some techniques in mitigating the following financial

risks:
1. Market Risks - The risk cannot be diversified because it affects the entire market, but it can

be hedged for minimal exposure. To identify potential losses, professional analysts use

the value-at-risk (VaR) method. VaR method is a statistical risk management method that

quantifies a stock or portfolio's potential loss as well as the probability of that potential loss
occurring. It also uses the capital asset pricing model (CAPM) to calculate the anticipated return

of an asset.

2. Credit Risks - to mitigate the credit risk, institution must provide loan which is the Lenders

can charge a high rate of interest, Lenders can inscribe stipulates on the borrower in the form of

an agreement called covenants, also they do Pre-payment in case of an unfavorable change in

the borrower’s debt-equity ratio or interest coverage ratio or they can mitigate credit risks by

diversifying the borrower funding pool and the Credit Insurance and Credit Alternative.

3. Liquidity Risks - The ability to recognize the warning signs of a liquidity crisis is one of the

most important aspects of measuring and managing liquidity risk. A business must be able to

measure risk magnitude in addition to recognizing these signs in order to take immediate and

appropriate action to prevent a downward spiral. Liquidity risk can be mitigated by forecasting

cash flow regularly, monitoring, and optimizing net working capital, and managing existing credit

facilities.

4. Operational Risks - there are four options for risk mitigation: transfer, avoid, accept, and

control. A common method to identify risk is to conduct the Brainstorming sessions and always

check or verify the effectiveness of the organization’s framework for risk management. Lastly,

the Risk map can also be helpful to identify the probability of occurrence of an event.

D. What are the major activities involved in Financial Risk Management.

Explain briefly.
The major activities comprise of Identifying the source or cause of financial risks wherein

the most common types of risks to which the company is exposed are liquidity risks, operational

risks, market risks, credit risks, and foreign exchange and interest rate risks, Then, the

Analyzing the impact of the financial risks over the company because the market is volatile, the

company must assess the severity of the risk and determine whether it is bearable by the
company, and Preparing plans and strategies to mitigate the risks which should ensure that the

strategies are implemented and closely monitored to track progress.

E. What are the steps involved in the risk management process.

Explain each step briefly.
There are five (5) steps involving the risk management process. The first step is to

identify the risks that the business is exposed to in its operating environment. There are many

different types of risks which is legal risks, environmental risks, market risks, regulatory risks,

and much more. It is important to identify as many of these risk factors as possible . Second

step, once a risk has been identified it needs to be analyzed and you must assess the risk by

evaluating and ranking the risk according to its priority.  Third step, treat or mitigate the risk

wherein every risk needs to be eliminated or contained as much as possible in an immediate

action.  Then next step will be monitoring to your computer because if any factor or risk changes

you must quickly notice it and the last step will be reporting because communication is effective

to keep engaging up.

F. Mention some strategies from protecting the business from financial risks.
Explain your answer.
The strategies that you need to do to protect your business from financial risks is to

identify the risk in your company that you always encountered especially to financial risk, asset-

backed, credit, foreign investment, liquidity, market, operational, and model risks. There can

also be external hazards that unfortunately you cannot control or predict, such as cyber-attacks

or even theft. After that, you must measure the financial risks and you need to quantify each

liability you noted in your list. And always learn about the understanding of investment because

ignorance can hide behind greediness, and you may possibly to fall for scams.