What is the difference between a financial exposure and a financial risk?

What is the difference between a financial exposure and a financial risk Introduction: The Intricacies of Finance Hello everyone, and welcome to today's video. Finance, with its multifaceted nature, often presents us with intricate concepts. Two such terms that are often used interchangeably, but hold distinct meanings, are financial exposure and financial risk. In this video, we'll delve into these concepts, highlighting their differences and significance. Defining Financial Exposure Financial exposure refers to the potential impact that external factors, such as market fluctuations or economic changes, can have on an investment or business. It's the vulnerability to losses or gains due to these factors. For instance, if a company has a significant portion of its revenue tied to a foreign currency, any fluctuation in that currency's value can directly impact the company's financials. In essence, financial exposure is the 'what could happen' scenario. Understanding Financial Risk On the other hand, financial risk is the probability of an adverse event occurring, leading to financial losses. It's an assessment of the likelihood of a negative outcome. Risk can arise from various sources, such as market volatility, regulatory changes, or even operational inefficiencies. Unlike financial exposure, which focuses on the potential impact, financial risk emphasizes the 'likelihood' aspect.