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Financial risk management is the practice of creating economic value in a Firm by using Financial Instruments to manage exposure to Risk , particularly Credit and Market Risk . Similar to general Risk Management , financial Risk Management requires identifying the sources of risk, measuring risk, and plans to address them. As a specialization of Risk management, financial risk management focuses on when and how to Hedge using financial instruments to manage costly exposures to risk. In the banking sector worldwide, Basel Accord are generally adopted by internationally active banks to tracking, reporting and exposing operational, credit and market risks. WHEN TO USE FINANCIAL RISK MANAGEMENT Finance theory (i.e., , the firm cannot create value by hedging a risk when the price of bearing that Risk within the firm is the same as the Price of bearing it outside of the firm.'' In practice, financial markets are not likely to be perfect markets. This suggests that firm managers likely have many opportunities to create value for shareholders using financial risk management. The trick is to determine which risks are cheaper for the firm to manage than the shareholders. A general rule of thumb, however, is that Market Risk s that result in Unique Risk s for the firm are the best candidates for financial risk management. REFERENCES SEE ALSO
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