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Reviewed by Sep 24, 2021| Updated on
In the financial world, risk management is known as the process of identification, analysis, as well as acceptance or mitigation of uncertainty in investment decisions. Typically, risk management happens when an investor or fund manager investigates and tries to quantify the potential for losses in any investment, such as a moral hazard, and then takes the relevant action (or inaction) given the fund's investment purposes and risk tolerance.
Risk management happens everywhere in the realm of finance. It occurs when an investor wants to buy U.S. Treasury bonds over corporate bonds or when a fund manager hedges his currency exposure with currency derivatives, or even when a bank conducts a credit check on an individual before issuing a personal line of credit. Stockbrokers make use of financial instruments like options and futures, and money managers use tactics like portfolio diversification, asset allocation and position sizing to mitigate or effectively manage risk.
Organisations maintain their financial risk in several ways. This process depends mainly on what the business does, what market it runs in, and the level of risk it is ready to accept. In this sense, it's entirely up to the business owner and directors of the company to recognise and assess the risk and decide how the company is going needs to handle them. Some of the steps in the financial risk management process include: