Risk is instability caused by unexpected outcomes such as variation of value of assets, equity or earnings, Uncertainty directly leads to Risk. The primary origins of risk be it man-made or accidental are natural disaster, regulatory and economic growth. They are both business and financial risks. Business risks are purposeful, and are essential for the creation of Shareholder value. For e.g. Business decisions (investments, products) and Business environment (competition & economy).Financial risks are the losses that are incurred because of the activities of the financial market. For e.g. Exposure of Interest rate, Accounts receivables and Defaults on financial duties

Firm being based as a Software firm continuously faces the risk of exchange rate which is a foremost financial risk. The environment of the business also creates business risks in some scenarios which needs to be systematically diminished. The foreign currency being one of the primary source of the firm’s revenue, there is always a high risk of exchange rate if and when the foreign currency devalues it will directly affect the firms revenues and profit. Another factor is competition in the Business environment can be the cause depreciation of profits with big and small competitors taking on the majority of market shares.

Financial Risk management can be said to be the construction and application of measures for Identifying, measuring the magnitude of the financial, and managing that risks. It is essential for the firm to identify, measure the magnitude of the risk, and manage financial risks as different sort of financial risk set into motion and threaten the organizations financial stature.

There are Different types of risks that the organization faces in which market risks, operational risks, credit risk are the primary.

Market Risk “Price level risk”

• Absolute vs. Relative: Market risk can be Absolute as in Dollar (or currency) the main focus is the disparity of assured returns. Relative Market risk is against a benchmark, the main focus is deviating from the benchmark or tracking the errors. The volatility of exchange rate can be risky as a deviation in the exchange rates can cause a massive disruption in the firm and might cause a huge amount of loss
• Directional vs. Non Directional: Directional is Movements in financial variables. For example: The rate of interest drops as stock prices move down, Price of Commodities change . Non Directional, the risks that stay, this includes hedged positions as well as Non-linear exposures, Basis risk, Volatilities. Volatility risk can only be anticipated as there is no absolute of what the interest rates are going to be. There are basis risks and volatility risk present in the hedges that an organization generates to hedge its exposure of exchange rates.

Market Risk is greater than Liquidity Risk

• Asset-liquidity (market liquidity): Could not quit the position at an existing market value because of the magnitude of the position
• Varies by…
• Asset class
• Existing condition of the Market
• Funding-liquidity (cash-flow) Unable to meet payment duties, Issues regarding balance sheet, conventionally apprehension of CFO.

Risk of Credit

• Default
• Credit deterioration (downgrade)
• M2M loss in value

A credit event happens when there is a change in oppositions ability to complete a duty. Sovereign risk is Country-specific (unlike default risk that is conventionally company-specific).The firm faces credit risk even when it has no outstanding bonds.

Settlement risk: When two payments are made by two parties with each other on the same day. Risk that counterparty may move out after the other firm had already made its payment. Under a software project agreement a revenue to be paid is settled and this settlement has risk of not being carrying out.

• Exposure before settlement : Only netted worth
• On the day of settlement : The entire value of remaining payments.

Operational Risk “Almost everything else”

• Internal processes
• Model risk
• People risk
• Legal risk

Firm face these below given Operational risks as well that can cause market or credit risks

• A failure in settlement can be the reason for creation of market risk because cost might sometimes depend on the variation in market prices

Operational risk is greater than Model risk

• Risk of losses owing to the fact that valuation models are flawed is called Model Risk
• “Very dangerous” and requires to be handled by someone who has a great knowledge of modeling process

Operational risk is greater than People risk

• People Risk constitutes of internal or external fraud
• For example:
• Rogue traders

Operational risk is greater than Legal risk

• Exposure to fines, penalties or punitive damages are the leading causes of the Origin of Legal Risks, which are a result of supervisory actions, as well as private settlements.
• Examples
• Opposing parties sue to nullify credit losses [related to credit risk]
• Corporations facing Shareholders lawsuit.

A risk profile is

• A list of all the potential threats that a firm might need to face
• They are segregated in different categories ;e.g., financial risks, market risks, operational risks
• When a firm (Board and Executives) has developed a Risk Profile, the following steps should be segregate them into 3 different categories :

1. Risks that should be allowed to pass through the firm to its owners,
2. Risks that should be protected,
3. Risks that should be exploited

Risk Management in firms following the methods through which directors approve, control, and check risk taking in a firm. Includes

• Skills, infrastructure (i.e., structure of the organization, management and information systems), and duties given out as they work under the supervision of directors.
• Efficient Risk Management gives out very clear and elaborate answerability, power, and communication/reporting techniques.
• Key players:
• Shareholders
• Board of Directors
• Managers

Enterprise Risk Management (ERM) aura is the management (needs measurement) of risk with a complete and healthy approach:

• Focus on complete, healthy approach move sideways from a “silo” effects.
• Risk management is (or if it isn’t in a firm then it needs to be) an activity that generates value, not merely a “mitigation activity.”
• ERM is a developing idea

All risks which have been  recognized , anticipated, and evaluated needs to go through treatment decision with four potential outcome:

• Risk avoidance
• Risk transfer
• Risk reduction
• Risk retention

Project generates risk which is not consistent with the risk policy of the organization

Risk Transfer; a.k.a., Risk Hedging

• As a substitute to evading, management may consider but “pass along” the risk to services provided by third-party through hedging. Conventionally achieved:
• Through purchasing insurance policies, or
• With financial derivatives (e.g., futures, options, and swaps) or other “more innovative” financial products (e.g., such as risk-linked securities and contingent capital)

Risk Retention

• Retention is a method where one decides to keep the risk:
• Purposeful: An organization specifically keeps a risk when it fits into the criteria of the organizations risk strategy; or
• Accidental: The risk had not been anticipated and that is why it has been generated.

Risk Reduction, Diversification and Other Policies

•The risk manager also can pursue a risk reduction behavior by engaging in a policy of investment portfolio diversification.