Chapter 7 financial risk management Brief contents： Definition of financial risk Evaluation of financial risk Control of financial risk 2019/4/9

Definition of financial risk Definition, features and types of risk Components of corporate business risk Influencing factors and types of financial risk 2019/4/9

Definition, features and types of risk 1.Risk refers to the possibility that the result of business activities varies from anticipated objectives. 2.Types of risk include: （1）natural risk and artificial Risk （2）wealth risk, human risk, responsibility risk and credit risk 2019/4/9 3

Definition, features and types of risk 2. Types of risk include: （3）controllable risk and uncontrollable risk （4）objective risk and subjective cost （5）macro risk and micro risk 2019/4/9 4

Definition, features and types of risk 3.features of risk （1）widely influences （2）uncertainty （3）disadvantageousness （4）risk return trade-off 2019/4/9 5

Components of corporate business risk 1.resources flow risk 2.information flow risk 3.funds flow risk 2019/4/9 6

Influencing factors and types of financial risk 1.uncontrollable risk 2.controllable risk Types： 1.financing risk 2.investment risk 3.earnings realization and distribution risk 2019/4/9 7

Evaluation of financial risk Procedure of financial risk evaluation Basic methods of financial risk identification Methods of financial risk evaluation 2019/4/9 8

Procedure of financial risk evaluation 1.Risk identification 2.Risk evaluation 3.Risk trade-off 2019/4/9 9

1. Risk identification To identify where the risks exist,why the risk exists, and the extent of its influences. 2019/4/9 10

2. Risk evaluation The test and estimation of risk under certain financial conditions, in order to assess the risk level of the financial activities and thus provide necessary information and base for financial decision-making. 2019/4/9 11

3. Risk trade-off On the basis of risk identification and risk evaluation, analyze the risk-return relation, and compare the return with costs to control the risk, to determine the corporation’s risk attitudes and its risk control strategies. 2019/4/9 12

Basic methods of risk identification 1.Decomposition method 2.Experts investigation method 2019/4/9 13

1. Decomposition method Decompose a complicated system into several parts or subsystems, and analyze them one by one, to summarize all the varieties of risks influencing the system operations. This is a basic method to identify risk. 2019/4/9 14

2. Expert investigation method （1）brain storm method （2）Delphy method （3）on-spot investigation method 2019/4/9 15

Methods of financial risk evaluation 1.Probability analysis method 2.Financial ratios analysis method 3.A combined application of risk evaluation methods 2019/4/9 16

Control of financial risk Definition of financial risk control Objectives of financial risk control Basic methods of financial risk control 2019/4/9 17

Definition of financial risk control Risk control is the core of risk management, including： 1.risk decision 2.risk prevention 3.risk treatment 2019/4/9

1. Risk decision Risk decision refers to the choice of risk project and the decision on how much risk the corporation is willing to take, on the basis of risk evaluation. 2019/4/9 19

2. Prevention of risk Prevention of risk refers to taking ex-anti measures to reduce possibility of loss by reducing risk, under given risk conditions. 2019/4/9 20

3. Treatment of risk Treatment of risk refers to taking corresponding measures to increase the anti-risk ability, reduce negative influences on corporation by loss and guarantee the continuous operation of the corporation. 2019/4/9 21

Objective of financial risk control The objective of financial risk control is to stabilize corporation’s future cash flow. 2019/4/9 22

Basic methods of financial risk control 1.Methods of risk prevention 2.Methods of risk treatment 2019/4/9 23

1. Methods of risk prevention （1）Risk avoidance method （2）Risk reduction method （3）Risk diversification method （4）Risk transfer method 2019/4/9

2. Methods of risk treatment （1）Before the loss occurs, establish provisions of risk and loss, in the form of prepayment or others. （2）When the loss occurs, take measures to stop loss. （3）After the loss occurs,write off the loss in time. 2019/4/9

Thank You ! 2019/4/9 2019/4/9 26