Management of Risk in Financial Services: An Overview

Management of Risk in Financial Services any risk: The term 'liquidity' means the state of being easily convertible h or availability of ready cash. Thus, liquidity risk is of two types: Funding risk: it is the inability to raise funds at the right cost. Assets liquidity risk: It is the lack of depth in the market for the 'trading of securities or any asset. — Credit/counter-party risk: It is the risk of default, that is, the other party will not honour its obligations. — Market risk: It is the risk of loss due to movements in financial market variables such as exchange rates, interest rate, security price, etc. It is therefore the risk of fluctuation in the portfolio value because of changes in such variables. Liquidity risk may lead to other risks such as market risk, credit/counter-party risk, etc. interest rate risk: One of the main factors affecting price movement of Stock, currencies and bonds is interest rate. This risk arises due to asset-liability mismatch. It is the exposure of a bank's financial condition to adverse movements in interest rates. It arises generally when long-term fixed assets funded with short-term volatile liabilities. Currency risk: This is the risk that a business house is subjected to while dealing with export or import contracts, involving exchange of one currency into another. Itemising change in the exchange rate in these transactions, it might lead to a situation which may be favourable or unfavourable to exporters and importers.