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Financial Risk Management

Financial Risk Management

Definition

Methods or strategies used to mitigate financial risks, also known as speculative risks, as opposed to pure risk (e.g., fire, flood) for which insurance is typically purchased. Examples of financial risk include currency fluctuations and changes in the cost of raw materials. Financial risks have traditionally been handled by hedging strategies that utilize various derivative-type instruments. More recently, the concept of insuratization (i.e., using an insurance product to mitigate financial risk) is being applied and has helped to facilitate the slow but steady convergence of the reinsurance and capital markets.

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