2.5 Financial Risks
Financial risks relate to changes in exchange rates, market risks, liquidity risks, or difficulties accessing capital. These risks can impact a company’s ability to procure raw materials or pay suppliers on time.
There are three major types of financial risks: market, credit, and price.
Market risk
Market risk refers to the uncertainty surrounding the future value of an investment due to potential changes in the overall market conditions. Some of the financial risks are systematic, and some are nonsystematic.
Some of the Market risk categories are (Elliott, 2018):
- Currency price risk: risks associated with the change in currency exchange rate
- Interest rate risk: the risk that the asset’s future value will decline due to the changes in the interest rates
- Commodity price risk: risk associated with the changes in the prices of commodities that are essential to the organization.
- Equity price risk: risk associated with the decrease in the price of the stock of the organization
- Liquidity risk: risk associated with the ability of the organization to raise cash or availability of cash reserves.
Credit Risk
Credit risk is the risk of loss that a lender faces when a borrower fails to meet their repayment obligations on a loan.
There are two types of credit risks: ‘Firm-Specific’ and ‘Systemic credit risk’, like the financial crisis 2008.
Price Risk
Price risk refers to the change in revenue or cost due to the increase or decrease in the price of products consumed.
Suppose a company imports raw materials from overseas. A sudden currency devaluation could increase the cost of these materials, affecting the supply chain’s financial stability.
