The field of financial risk management is growing by the day owing to the increasing risks in firms. FRM controls loss of finances in firms opening up ways for better profit share. There are various types of risk management tools such as directives, VaR, integrated risk management, Stop-loss limit, Notional limit, Exposure limit and so on. All these risk management tools helps one to control financial risks in firms. With FRM , a firm can avail host of benefits.
Reducing Information Asymmetries:
Many a times, there exists information asymmetry between the insiders and the external investors. Insiders have a greater knowledge about the firm’s position. Therefore, the outsiders always want the firm to reduce risk from activities that are outside management control. This helps in building up their confidence and lowers their return expectations. This again in turn reduces the cost of capital to the firm and increases firm value. This benefit of financial risk management associated with reducing information asymmetries can be concludes as below:
- FRM can help firms to lower the risk from activities that are outside management control and boost investor confidence
- FRM can reduce cost of capital and increase firm value