What Is Risk Management?

Risk management is the process of identifying, analyzing, and accepting or mitigating uncertainty in investment choices in the financial sector. Risk management is defined as an investor or fund manager analyzing and attempting to quantify the possibility for losses in an investment, such as a moral hazard, and then taking the right action (or inactivity) given the fund’s investment objectives and risk tolerance.
Return is inextricably linked to risk. Every investment has some level of risk, which may range from near zero in the case of a US T-bill to extremely high in the case of emerging-market equities or real estate in high-inflationary economies. Risk can be measured in both absolute and relative levels. A thorough grasp of risk in its many manifestations can aid investors in better comprehending the opportunities, trade-offs, and costs associated with various investing strategies.

Risk management refers to the process of assessing, identifying, and controlling threats to your organization’s capital, earnings, and profits. These threats (risks) could come from different sources including legal liabilities, financial uncertainties, natural disasters, accidents, or strategic management errors.

The risks of trading Forex include:

  • Country risk (e.g., ratings downgrade)

  • Sovereign risk (e.g., asset-freezing, expropriation)

  • Liquidity risk (no buyers if you are a seller)

  • Credit risk (counterparty or broker fails)

  • Price risk (price moves against you fast and without warning)

The important thing is to try to weigh the cost of managing risk against the benefits of managing the risk.