The Impact of Financial Risks on the Firms’ Performance

Abstract

Firms are exposed to a variety of risks including credit risk, liquidity risk, foreign exchange risk, market risk and interest rate risk. An efficient risk management system is needed in time in order to control these risks. Managing risk is one of the basic tasks to be done, once it has been identified and known. The risk and return are directly related to each other, which means that increasing one will subsequently increase the other and vice versa.

Financial risks have a great impact on firm’s performance. The study also assessed the current risk management practices of the firms and linked them with the firms’ financial performance. The findings confirm whether financial risks can be contained or managed in order for firms to achieve profit maximization for its shareholders.

Keywords: Financial Risk; Firm’s Performance; Interest rate parity; Liquidity gap; Liquidity risk; Risk Management.