Financial risk refers to the potential for monetary loss due to factors like market fluctuations, changes in interest rates, credit defaults, operational failures, or shifts in the broader economic environment. This risk can affect businesses, individuals, governments, or financial markets, leading to losses after investments.

Financial risk impacts an organization’s profitability, cash flow, and overall financial stability. It can take many forms, including:

• Market Risk (fluctuations in market prices)
• Liquidity Risk (inability to meet short-term financial obligations)
• Credit Risk (defaults or failure to pay)
• Operational Risk (failures in internal processes)
• Legal Risk (legal actions that could result in financial loss)
• Foreign Exchange Risk (losses due to currency exchange rate changes)

Effective financial risk management is key to minimizing losses. It involves analyzing business decisions to assess potential gains or losses and developing strategies to reduce exposure to these risks.