Financial risk encompasses the potential for monetary loss or reduced asset value as a result of various economic, operational, or external factors. It can arise from multiple sources such as fluctuating interest rates, poor creditworthiness of borrowers, volatile market conditions, inflation, or unforeseen events like geopolitical instability. For instance, investing in stocks carries the risk of loss if the market declines. Businesses face financial risks in the form of credit risk, liquidity risk, and operational risk, which can impact their financial stability and ability to meet obligations. Managing and mitigating financial risk is crucial for individuals and organizations, and this is done through strategies such as diversification, insurance, risk assessment, and hedging.

For example, a company may use hedging techniques to reduce the risk associated with currency fluctuations in international trade. Similarly, individuals opting for fixed-rate mortgages over variable-rate loans manage their financial exposure to interest rate changes.