FACULTY OF BUSINESS

ACCOUNTING SCHOOL

Financial Risks And Their Management

COURSE:

FINANCIAL ANALYSIS FOR DECISION-MAKING

AUTHOR

Ocampo Julian, Maylee

TEACHER:

Walter Orlando Campos Valles

MOYOBAMBA - PERÚ

2024
 INDEX

INTRODUCTION.......................................................................................................... 3

DEVELOPMENT:..........................................................................................................4

ANNEXES.....................................................................................................................8

BIBLIOGRAPHIC REFERENCES................................................................................9
INTRODUCTION
In finance, risk is the probability of investment loss. There are two types of risk:
unsystematic risk and systematic risk. In the Latino area, a study carried out by
(Ayala Sanchez, 9 octubre 2018) recommends the creation of a financial risk control
office and always accompanied by a financial management plan, taking into account
that there is no perfect recipe for how the market will behave. As can be seen, any
mechanism, action, activity or task adds up to face the challenges that may appear in
the aspect such as financial risk. Now let's look at other challenges that arise in Latin
America, such as the southern country of Chile. In Chile, companies also present
challenges in terms of financial risks, the current situation has considerably affected
Chilean companies, the pandemic has brought hundreds of companies to the brink of
bankruptcy, as a strategy to rescue these companies has been A credit of 23.8 billion
dollars was conceived, this money would come from the International Monetary Fund
(Banco Central Chile, 2020). In this way, the 2 challenges faced by companies,
especially those that present financial liquidity challenges, would be faced.

According to (Chile, 13 mayo 2020) He mentioned that in Peru companies need to

have efficient financial management, but in most companies they are limited because
they do not have proper financial planning and in turn do not control said planning. In
this context, construction companies that have the problem of not having adequate
financial management are being included and this leads to financial risks, among
which we have market, credit and liquidity risk, the latter having a reasonable impact
on the company

The main objective of this is to minimize as much as possible the impact it can have
on the organization and maximize its opportunities for growth and profitability. To
achieve this, financial professionals use a variety of tools and techniques.
DEVELOPMENT:
One of the advantages offered by new technologies is that it is increasingly easier to
measure financial risk. In fact, according to (Fidlow, 22 Noviembre 2021), leader of
the global Core Analytics team, Willis Towers Watson's Risk & Analytics Department,
thanks to Big Data, the ability to quantify risk today is up to 10 times greater. In
addition, according to the Gini Index, Big Data and Machine Learning technologies
would have increased the ability to detect credit repayment problems by between
60% and 90%.

What is the financial risk management process?

Assessing risks is a very important element that consists of at least 4 phases, such as
those mentioned below:

identify the problema

At this stage, the aim is to identify the possible financial conflicts to which the
organization is exposed. These can arise due to many factors, such as the fall in the
markets, economic problems inside or outside the company and even political factors.
Risk identification can be done through various techniques such as:

• Performing the review of the organization's financial reports.

• consulting with experts in the field.
• the evaluation of hazards at the industry level.

It is important to note that this is an ongoing development as issues can arise at any
time and change regularly. Therefore, it is necessary to constantly monitor and be
prepared to respond to any changes in the financial environment.
Evaluación de la exposición al riesgo
Once we have identified the possible dangers we move on to the next phase. At this
stage, the likelihood and potential impact of each identified risk is assessed.

This evaluation will help us determine the magnitude of the hazards that may exist,
their impact, and the probability of their occurrence. “Probability” refers to the
frequency with which an event may occur, while “impact” refers to the magnitude of
damage or financial loss that may occur. The assessment can be carried out using
techniques such as scenario analysis, sensitivity analysis and simulation modelling.
These make it possible to define the most serious risks and prioritize mitigation
strategies.

Implementation of measures to manage risk

At this point, actions are taken to minimize or control the hazards identified and
evaluated. There are several strategies that can be used to do this:
• Acceptance: In some cases, it may be more economical or practical to accept
the risk rather than try to mitigate it.
• Avoid It: Evaluate whether actions can be taken to avoid the problem
altogether, such as not making an investment in a specific market or not
making a transaction with a particular counterparty.
• Risk transfer: Risk can be transferred to another party by taking out insurance
or using financial instruments such as derivatives.
• Mitigation : If possible, internal measures are taken to reduce the probability or
magnitude of a problem, such as diversifying the investment portfolio or
improving internal controls.

Newspaper Analysis
The last step in the financial risk management process is to carry out a periodic
analysis of these and evaluate the effectiveness of the measures implemented to
control and manage the conflict.

What are the main financial risks?

The main financial problems include:
• Market: Refers to uncertainty in financial markets and the impact that this may
have on the valuation of assets.
• Credit: This is the possibility that a counterparty does not comply with its
financial obligations.
 • Lack of liquidity: It is the possibility that an investment cannot be sold or
exchanged for cash in a reasonable time at its current value.
• Interest rate risk: Refers to uncertainty in interest rates and their impact on
future cash flows.
• Exchange risk: It is the uncertainty in exchange rates and their impact on cash
flows in foreign currency.
• Operational: This is the possibility of losses due to errors, fraud, technical
failures or other internal events.
• Compliance: Here we talk about the possibility of non-compliance with
regulations or applicable laws.

These are just a few of the top financial dangers, and the list can vary depending on
the industry, size, and structure of the organization.

It is important to note that these conflicts can interact and have cumulative effects, so
it is necessary to consider them comprehensively and holistically in the management
process.

Types of financial risks

Financial risks can be classified into different categories, depending on their nature
and origin:
1. Market risk:

Systemic risk: It affects the entire market or an industry in general, and cannot be
controlled by a single company or individual. Examples: economic crises, recessions,
natural disasters.
Non-systemic risk: It affects specific companies or sectors, and can be mitigated
through diversification strategies. Examples: changes in consumer preferences,
technological advances, competition.

2. Credit risk:

Sovereign risk: Probability that a government will default on its debt obligations.
Issuer risk: Probability that a company or individual will be unable to meet its debt
payments.

3. Liquidity risk:

Market liquidity risk: Difficulty in buying or selling assets in the market quickly and
efficiently.
Financing liquidity risk: Difficulty obtaining financing when needed.

4. Operational risk:

Fraud risk: Losses due to fraudulent activities within the company.

Risk of errors: Losses due to human errors in decision making or execution of
operations.
Disruption risk: Losses due to events that interrupt the company's normal operations,
such as natural disasters or computer system failures.

5. Regulatory risk:

Changes in laws or regulations: They can affect the way a company operates, its
products or services, and its profitability.
Regulatory compliance: Costs associated with compliance with laws and regulations.
ANNEXES
BIBLIOGRAPHIC REFERENCES
- Ayala Sanchez, J. W. (2018),
de
http://repositorio.uladech.edu.pe/handle/123456789/5459.

- Gestion.pe. Banco Central Chile. (2020), de

https://gestion.pe/mundo/sistemafinanciero-de-chile-enfrenta-volatilidadpor-

pandemia-suben-riesgos-senalabanco-central-noticia/

- Martínez, M. G. (2021, noviembre 22). El Big Data y la gestión del riesgo

financiero. Nuestros Datos Seguros. https://nuestrosdatosseguros.es/el-big-

data-y-lagestion-del-riesgo-financiero/