Financial Risk Management - Essay Example

The paper would be reflecting the financial risk rising from various perspectives i.e. personal level, institutional level followed by financial risk from the perspective of Islamic religion. Risk management is an essential activity for controlling and eliminating the financial risks in the aforementioned viewpoints. The paper would be discussing the risk management procedures found effective in each of these perspectives. Table of Contents Abstract 2 Table of Contents 3 Personal Risk Management 4 Financial Risk management in Financial Institutions 6 Financial Risk Management: An Islamic View 9 Is the Financial Risk Management Applied 11 Conclusion 12 References 13 Personal Risk Management Risk management should be the main focus point of the financial plan of the investors.

There are some investors who do not focus on this aspect of the investment procedure. There are various risks associated with the investment procedure. The first risk is referred as the performance risk. The investors need to have diversified portfolio for reducing the performance risk. The second risk involves the volatility risk. The asset classes such as equity and gold tend to give high return on investment in the context of long term period. But it becomes necessary to reduce the volatility risk in the short term and medium term period.

The third risk is associated with risk of inflation. This is one of the biggest risks for any long term investor. The asset allocation should be done in such manner that it would be able to beat the inflation over any period of time. In today’s world, making investment has become one of the most important activities in life for every individual. In such case, it is pertinent that all the investors should possess knowledge to certain extent related to the investment risk management. Financial risk management can be explained as a procedure of dealing with uncertainties arising in the financial markets.

While the financial institutes handle very complex series of procedures for managing the risk, the individuals are required to have knowledge about risk management as well. The individuals need to: 1) Understand the risk tolerance in both emotional and financial terms. 2) Understand personal level of the risk tolerance. 3) Assess and compare the personal risk capacity with the risk tolerance. 4) Identify an effective asset allocation investment portfolio. The aforementioned framework provides a guideline of the understanding of risks, managing them and making effective investment decisions.

Risk capacity and risk tolerance are two important attributes associated highly with the risk factor. Risk tolerance can be described as the psychological or emotional attribute and risk capacity can be defined as the financial attribute of the risk factor. Risk Tolerance The fundamental explanation of the term ‘risk’ is the chance of losing something. In investment decision, there remain chances of losing money as well. With greater probability of big profits, prospect of the losses to take place remains higher.

Thus it becomes important to carefully consider the risk tolerance while planning for an investment strategy. Risk tolerance determines the psychological receptiveness of an individual associated with the risk and level of anxiety experienced in various situations where the risk factor is evident. It