Management Of Investment Risk

A financial institution has as one of his duties the management of financial risk. They need to manage it well otherwise they will not be in business for long. Credit reports and collateral are some of the risk management instruments that consumers are familiar with. They can seem oppressive when applying for a loan but a few were the lender you would understand their importance and that a handshake deal or a gentleman’s agreement doesn’t do much in terms of offsetting risk.
Even the best forex trading doesn’t come without its share of risk. Liquidity risk is the risk that a financial institution will be unable to generate sufficient cash inflow to meet required cash outflows. Liquidity is critical to financial institutions such as banks and credit unions that need liquidity to meet deposit withdraws and pay off other liabilities as they come due such as pension funds which need liquidity to meet contractual pension payments and life insurance companies need liquidity to pay death benefits. The quiddity also means that an institution need not pass up a profitable loan or investment opportunity because of lack of cash. If a financial institution is unable to meet its short-term obligations because of inadequate liquidity than the firm will fail even though over the long run the firm may be profitable.
Foreign exchange risk is the fluctuation in the earnings or value of a financial institution that arises from tuition in exchange rates. Many financial institutions deal in foreign currencies either for their own accounts or the by or sell currencies for their customers who are acting on forex trading tips. There is considerable risk involved in dealing in foreign currencies and institution must offset then carefully as just the mere announcement of changes in interest rates can severely affect one’s position in the foreign exchange market.