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Financial Risk

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Introduction

Financial risk takes place when an individual or company is exposed through numerous financial transactions. These transactions may include sales, purchasing, different types of investments, loans, volatile markets due to political situations and more. Financial prices may change as a result of changes in interest rates, inflation, the exchange rate, and many more economic reasons such influences of the European markets as well as the United States. These occurrences can result in increased cost and reduced revenues. It is clear that these aspects make it difficult to plan the operations of an organization. Another aspect that greatly influences the financial risk of organisations is Porter’s Five Forces analysis. Figure 1 below shows how these forces interact.
Figure 1 – Porter’s Five Forces analysis model

If these forces are intense such as in the airline industry, the risk is much greater. If these forces are benign, such as in the soft drink industry, the risk might not be very great.
Systematic risk

Systematic risk is also known as market risk or un-diversifiable risk. It is the uncertainty inherent to the entire market or segment. This type of risk consists of fluctuations in a stock’s price. Volatility is a measure of risk because it refers to the behaviour or temperament of an investment rather than the reason for this behaviour. Sources of systematic risk normally affect the entire market and cannot be avoided through diversification. Examples of these sources are interest rates, recession and wars. Systematic risk can be mitigated only by being hedged. Systematic risk underlies all other investment risks. If there is inflation, you can invest in securities in inflation-resistant economic sectors. If the interest rates are high, you can sell your utility stocks and move into newly issued bonds. If the entire economy underperforms,

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