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Financial Risk Management

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Financial risk management - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Financial_risk_management Financial risk management From Wikipedia, the free encyclopedia. Financial risk management is the practice of creating value in a firm by using financial instruments to manage exposure to risk. Similar to general risk management, financial risk management requires identifying the sources of risk, measuring risk, and plans to address them. As a specialization of risk management, f
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  inancial risk management - Wikipedia, the free encyclopediahttp://en.wikipedia.org/wiki/Financial_risk_management1 of 29/1/2005 2:09 PM Financial risk management From Wikipedia, the free encyclopedia. Financial risk management is the practice of creating value in a firm by using financial instruments to manage exposureto risk. Similar to general risk management, financial risk management requires identifying the sources of risk, measuringrisk, and plans to address them. As a specialization of risk management, financial risk management focuses on when andhow to hedge using financial instruments to manage costly exposures to risk. Contents 1 When to use financial risk management2 Important financial instruments3 References4 See also5 links5.1 Risk Management Certification Programs5.2 Associations5.3 Lists When to use financial risk management Finance theory (i.e. financial economics) prescribes that a firm should take on a project when it increases shareholdervalue. Finance theory also shows that firm managers cannot create value for shareholders, also called its investors, bytaking on projects that shareholders could do for themselves at the same cost. When applied to financial risk management,this implies that firm managers should not hedge risks that investors can hedge for themselves at the same cost. Thisnotion is captured by the hedging irrelevance proposition:  In a perfect market, the firm cannot create value by hedging arisk when the price of bearing that risk within the firm is the same as the price of bearing it outside of the firm. In practice,financial markets are not likely to be perfect markets. This suggests that firm managers likely have many opportunities tocreate value for shareholders using financial risk management. The trick is to determine which risks are cheaper for thefirm to manage than the shareholders. A general rule of thumb, however, is that market risks that result in unique risks forthe firm are the best candidates for financial risk management. Important financial instruments Because of their ability to offset specific risks, derivative securities (also called derivatives) are commonly used infinancial risk management. The most commonly traded derivatives include options, futures, forwards, and swaps. Marketrisk factors that derivatives are commonly based on include stock prices, stock indices, commodity prices, interest rates,and foreign exchange rates. Because unique derivative contracts tend to be costly to create and monitor, the mostcost-effective financial risk management methods usually involve derivative that trade on well-established financialmarkets. References Alexander, Carol and Sheedy, Elizabeth (2004). The Professional Risk Managers' Handbook: A Comprehensive Guide toCurrent Theory and Best Practices (1st ed.) . Wilmington, DE: PRMIA Publications. ISBN 0-9766097-0-3.Alexander, Carol and Sheedy, Elizabeth (2004). The Professional Risk Managers' Handbook: Volume I: Finance Theory,  inancial risk management - Wikipedia, the free encyclopediahttp://en.wikipedia.org/wiki/Financial_risk_management2 of 29/1/2005 2:09 PM Financial Instruments, Markets (1st ed.) . Wilmington, DE: PRMIA Publications. ISBN 0-9766097-1-1.Alexander, Carol and Sheedy, Elizabeth (2004). The Professional Risk Managers' Handbook: Volume II: MathematicalFoundations of Risk Measurement (1st ed.) . Wilmington, DE: PRMIA Publications. ISBN 0-9766097-2-X.Alexander, Carol and Sheedy, Elizabeth (2004). The Professional Risk Managers' Handbook: Volume III: Risk  Management Practices (1st ed.) . Wilmington, DE: PRMIA Publications. ISBN 0-9766097-3-8.Stulz, René M. (2003).  Risk Management & Derivatives (1st ed.) . Mason, Ohio: Thomson South-Western. ISBN0-538-86101-0. See also Risk managementValue at risk  links The Contingency Analysis (http://www.contingencyanalysis.com/) family of websites is an on-line portal forfinancial risk management.Investing and Risk (http://www.greekshares.com/risk.asp)Investing and Types of Risk (http://www.greekshares.com/risktypes.asp) Risk Management Certification Programs The Professional Risk Manager certification (PRM) (http://prmia.org/certification/cert.php)The Financial Risk Manager certification (FRM) (http://www.garp.com/frmexam/) Associations The Professional Risk Managers' International Association (PRMIA) (http://www.prmia.org)Global Association of Risk Professionals (http://www.garp.com/index.asp) Lists List of finance topicsRetrieved from http://en.wikipedia.org/wiki/Financial_risk_management Categories: Management | Risk | Financial mathematics This page was last modified 17:25, 27 August 2005.All text is available under the terms of the GNU Free Documentation License (see Copyrights fordetails).
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