General Information and definition
General Information and definition
Risk is an objectively existing possibility of failure, loss or damage as a direct result of an activity.
Defined in financial terms, risk is the chance that an outcome or investment’s true gains will
differ from an expected outcome or return. It includes the possibility of losing some or all of an
original investment due to making poor economical decisions. This may cause a decrease in
potential profits such as loss of financial liquidity, bankruptcy of an organization or huge debt
which entails legal liability.
The size of risk depends on numerous interrelated factors, the majority of which is independent
of the activity of an organization. These include: general economic, social, political, demographic
and technical factors. Financial risk is a danger which results from making a profit whose amount
is different than expected.
Risk management concerns the identification of the type of risk a company may be exposed to
followed by measuring and controlling such risk with the use of available methods.
Therefore, risk management may be defined as a logically arranged set of principles and rules
which are applied with respect to all company activities in a uniform and continuous manner.
Financial Risk Management (FRM for short) is defined as the practice of protecting economic
value in a firm. This is done by using financial instruments to manage exposure to risk. In order
to do so, there needs to be an understanding of possible financial risks to the business with the
added factor of time
