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Risk and its types in risk management in the FOREX MERCHANT ACCOUNT financial sector

Managing risk is one of the top topics for discussion in the financial industry. The notion of risk has a growing significance in the modern financial industry. The operating environment in today’s business requires highly integrated and systematic approach for risk management.

Risk – By default, risk can be divided into two components – exposure and uncertainty. When both these components are present, then risk does not exist. In a financial institution, a financial risk is the probability that an action or event’s outcome could have adverse impacts. These outcomes lead to loss of capital or earnings or could result in constraints being imposed on the financial institution’s ability of satisfy the business objectives. These constraints could impose risks such as hindering the ability of a bank to benefit from opportunities in order to improve its business or to carry out the ongoing business.

Types of risks – Generally, risks are defined based on the negative impact they have on the profits from the various sources. Almost all the banks or financial institutions need to face and manage the following risks –

  1. Liquidity Risk
  2. Market Risk
  3. Credit Risk
  4. Legal Risk
  5. Country Risk
  6. Operational Risk
  7. Reputational Risk
  8. Compliance Risk

Generally speaking, there exist 4 risks according to Guidelines for Risk Management which affects the financial industry. They are Operational Risk, Liquidity Risk, Market Risk and Credit Risk. Following in the explanation of these risks:

Credit Risk – A credit risk is incurred due to counter-party defaults. This type of risk occurs due to investing activities, lending activities and due to the buying or selling of financial assets for others. This type of risk is related to financial transactions, that is:

-       Default by a borrower in making a repayment, and

-       Default in fulfilling the agreement by another bank or financial institution with respect to syndicated arrangements.

Credit risks are very critical in the banking sector and need to be managed with upmost care. Credit risks require highest level of subjective judgement in spite of constant efforts for quantifying and improving credit decision processes.

Market risk – The term market risk defines the unpredictability of market value or income because of the fluctuations that occur in underlying market issues such as credit spreads, currency, and interest rates. For commercial financial institutions, market risk arises due to mismatches that occur between an asset’s risk profile and its funding. Marker risk also includes interest rate risks in all its components: commodity risk, exchange risk and equity risk.

Liquidity risk – The term liquidity risk defines the risk of being unable to meet commitments or being unable to offset or wind positions by a company within the time constraints. This is because it will lead to non-liquidation of assets at rational costs when required.

Operational Risk – An operational risk occurs due to insufficiency in the organisation, conception and implementation of processes for recording event with respect to the operation of a bank in the information system or accounting system. Contact one of our helpful account representatives to assist you in the setup of a high risk merchant account or offshore merchant account for a high risk merchant.