Financial Risk Management Law and Legal Definition

Financial risk management refers to the method adopted for mitigating the various financial risks such as the credit risk, market risk, foreign exchange risk, inflation risks and others. It is to be noted that financial risk management activities focus primarily market risk and credit risk. Market risk is the risk of loss that may arise if security prices vary, and credit risk is the risk of loss that arises when a business partner files for bankruptcy. These risks are typically remedied by using financial instruments and creating economic value in a firm. Here, the financial risk manager identifies the risk, evaluates all possible remedies, and then will implement the steps necessary to mitigate the risk. Since, most of the financial risks are unexpected and cannot be addressed quickly enough; the financial risk management cannot prevent a firm from all possible risks. Financial risk management activities help to prevent major losses in corporate transactions.