Financial risk management is the practice of identifying, assessing, prioritizing, and developing actions to address financial risk. Financial services firms often manage financial risk using financial instruments. An investment in a financial instrument for the purpose of managing risk is commonly referred to as hedging.
Financial management organizations classify financial risk into four main types:
Effective techniques for managing and analyzing credit risk include creating customized risk models, performing Monte Carlo simulations, and analyzing scenarios to assess risk exposure from financial engineering and other financial activities.