Financial Risk Manager Part 1
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In financial markets, risk management plays a pivotal role in safeguarding investments and financial activities from potential losses. It involves a series of activities that aim to create economic value. Among the following options, which one best encapsulates the definition of risk management in the context of financial markets?
Other
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TTanishq
A
The practice of creating economic value by identifying and investing in risky projects that could earn a profit.
B
The practice of avoiding an extremely risky financial undertaking to prevent a loss.
C
The practice of creating economic value by identifying and measuring risks, and formulating robust plans to address and manage these risks.
D
Setting risk limits beyond which an entity should not operate.
Explanation:
Risk management in the context of financial markets involves identifying and measuring risks associated with a business, both qualitatively and quantitatively, and formulating robust plans to address and manage these risks. The goal of risk management is to create economic value by minimizing the negative impact of risks on the business while maximizing the positive outcomes of risk-taking. This involves a range of activities, including risk identification, risk assessment, risk mitigation, risk monitoring, and risk reporting.
Why other options are incorrect:
- A: Risk management is not about investing in risky projects to earn a profit. Instead, it is about identifying and managing risks associated with a business to minimize negative outcomes and maximize positive outcomes.
- B: Risk management is not about avoiding all risky financial undertakings to prevent a loss. Instead, it is about identifying and managing risks associated with a business to minimize negative outcomes and maximize positive outcomes.
- D: Setting risk limits is an important part of risk management, but it is not the only aspect. Risk management also involves risk identification, risk assessment, risk mitigation, risk monitoring, and risk reporting.
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