Default Risk Management Research Paper Example | Topics and Well Written Essays - 1750 words - 1

Default Risk Management - Research Paper Example This essay stresses that businesses are able to reduce different threats that they face from external environment by identifying the risks they face and then taking steps to mitigate them. One of the major risks faced by financial institutions is the default risk. Default risk is the risk that the firm faces when it is not able to meet the financial obligations when they are due. Default risk is also named as credit risk as the firm does not have the ability to pay off its creditors. However in case of a financial institution like banks, the scenario may be complex, as these banks give loans to different creditors which, in turn, can face default, and this could affect the liquidity position of the banks as they do not have funds according to what they expected and thus can increase the default risk of banks. This essay declares that market risk is the other type of risk faced by the firm, and it is because of fluctuations and conditions in the market. Market risk could be because of fluctuations in currencies, exchange rates, interest rates, volatility in other markets, etc. that could influence the future cash flows of the firm. It is important for the financial institutions to analyse different market trends and the risks that could arise because of changes in the market and then take actions or steps to minimise the impact of these types of risks accordingly. There are some risks, such as chances in the exchange rate, that cannot be eliminated.