Risk flows (returns) to deviate from expected cash

Risk can be explained as uncertainty and is
usually associated with the unpredictability of an investment performance. All
investments are subject to risk, but some have a greater degree of risk than
others. Risk is often viewed as the potential for an investment to decrease in
value. Though quantitative analysis plays a significant role, experience,
market knowledge and judgment play a key role in proper risk management. As
complexity of financial products increase, so do the sophistication of the risk
manager’s tools. We understand risk as a potential future loss. When we take an
insurance cover, what we are hedging is the uncertainty associated with the
future events. Financial risk can be easily stated as the potential for future
cash flows (returns) to deviate from expected cash flows (returns). There are
various factors that give raise to this risk. Return is measured as Wealth at
T+1- Wealth at T divided by Wealth at T. Mathematically it can be denoted as
(WT+1-WT)/WT. Every aspect of management impacting profitability and therefore
cash flow or return, is a source of risk. We can say the return is the function
of.

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Prices

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·        
Productivity

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Market Share

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Technology

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Competition

                                                      

Financial risk management focuses on risks that
can be managed using traded financial instruments (changes in commodity prices,
interest rates, foreign exchange rates and stock prices). Financial risk
management will play an important role in cash management. This area is related
to corporate finance in two ways. Firstly firm exposure to business risk is a
direct result of previous Investment and Financing decisions. Secondly, both
disciplines share the goal of creating, or enhancing, firm value. All large
corporations have risk management teams, and small firms practice informal, if
not formal, risk management. Derivatives are the instruments most commonly used
in financial risk management. Because unique derivative contracts tend to be
costly to create and monitor, the most cost-effective financial risk management
methods usually involve derivatives that trade on well-established financial
markets. These standard 

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