Financial Risk Management

risk management.jpg

Financial risk management is a continuous, cyclical and dynamic process. In 1983, at the American Association of risk and insurance management, risk management experts from all over the world jointly discussed and adopted "101 risk management guidelines", which are used for reference by companies all over the world. General risk management is divided into three stages: risk identification, risk measurement and risk control.

1. Risk Identification


Risk identification refers to the qualitative identification of risks before the occurrence of risk accidents. The risks in the real society are not always exposed. The risks that are not identified or wrongly identified are not only difficult to optimize the management, but also cause unexpected losses. Therefore, at this stage, the means of risk identification, the collection and identification of relevant information, the summary and classification of risks, and the monitoring of risk trend are necessary. Risk identification is the basis of risk management program.

2. Risk Measurement


Risk measurement refers to the process of measuring the size of risk by using various methods on the basis of risk identification. In different time and place, the degree of risk and loss is different. Accordingly, in the aspects of whether to manage and how to manage, accurately measuring the degree and difference of risk becomes the key factor to improve the efficiency and quality of risk management.

Risk measurement is the most important part of risk management program, which directly determines the enterprise's attitude to risk and decision-making results. There are many ways to measure risk. According to whether it can be measured, it can be divided into measurable risk and non measurable risk. Measurable risk refers to the risk that can be calculated by mathematical methods and judged by the size of relevant indicators. Commonly used measurement methods are: mathematical statistics, leverage analysis and capital asset pricing model. These three methods are different in the scope of use, and have their own advantages and disadvantages. The advantages of mathematical statistics are scientific, rigorous and logical; The disadvantage is that the sample selection and probability estimation are too demanding, and the calculation process is complicated. Leverage analysis directly uses the data of financial statements, which is simple to calculate and easy to understand and master. However, the logical relationship between leverage factor and risk is not clear, and sometimes there will be deviation. When the capital asset pricing model (CAP) measures the risk, the calculation of beta coefficient is troublesome. It needs strong professional theoretical knowledge and empirical judgment, and more accurate mathematical statistics. Therefore, this method is suitable for large-scale enterprise groups with good statistical basis, accurate statistical data and high reputation.

3. Risk Control


After completing the above steps, it is necessary to make decisions on whether to implement risk control and how to implement it. Risk control methods are divided into two categories: institutional control and technical control. System control basically belongs to the category of management, including the organization setting, staffing and system design related to risk events. All of them are inextricably linked with risk control, which are the embodiment of risk control system. The main methods of technology control are dispersion method, transfer method and avoidance method.

It should be noted that the risk management process seems to be in order in theory. However, in practice, risk identification, risk measurement and risk control should be adjusted continuously, and not be limited to fixed procedures, because risk will change with the development of environment and events.

To sum up, risk runs through the whole process of enterprise management. It can be said that the process of enterprise management is the process of risk management. Under the new situation, it is a vital matter for an enterprise to correctly understand the risks, grasp the characteristics of risks, understand the dialectical relationship between risks and environmental changes, and master the methods of risk management.