What does the funding risk?
Funding risk ( Risk Financing ) means the formation or receipt of funds for the payment or reimbursement of losses incurred organization.
Funds to pay for damages or organization can be formed either from internal sources such organizations as the cash flow from operating activities or assets, or from external sources, such as funds of insurers, banks, shareholders (in case of additional issue to cover the damage).
Sources of funding mogug formed as before damage (pre-Loss fmancing) , and after the occurrence of the damage (Post-lossfincmcing) . In addition, the organization is able to use the benefits associated with the risks faced by the organization, to compensate for some or all of their losses.
Example risk financing
Showroom, located in a separate building, is at risk because there is a possibility of damage due to fire. If this happens, the funds for the restoration of the building (which, in fact, is the brunt of the damage) can be obtained at the expense of the organization itself, but only if it will have sufficient cash assets available at that time to pay renovation and equipping of the room. However, the auto could implement the pre-financing of this risk by purchasing an insurance policy before the accident. In this case, the consequences of a fire would be financed from an external source, such as an insurance company that would pay for the restoration of the building after the fire.
US importer, to enter into contracts in foreign currencies are also at risk, since the exchange rate of foreign currencies against the US dollar may rise or fall. If the foreign exchange rate increases, the importer incurs losses, as it has to pay a large sum in dollars to buy imported goods.
In this case, the importer may pay damages from its own funds. An alternative option compensation is to buy financial instruments to hedge (hedge) the currency risk arising from contractual obligations. This is - an example of pre-financing risk (pre-Loss Financing) .
