Credit History

• One of the main things that a bank looks at when evaluating the risk involved with issuing a loan to a potential borrower is that individual's credit history as reported by the credit bureaus. This history is composed of various actions that person has taken -- such as paying loans, getting credit cards, applying for credit and failing to make required payments on time -- and a credit score that aggregates all of these actions together into a simple number. Banks are not the only institutions that use credit histories to measure financial risk in individuals: employers may check the credit histories of job applicants to find out whether or not they are responsible before investing time and money into them.
  
  

Financial History

• An individual's or company's financial history is related to credit history, but they are not the same thing. Unlike credit history, financial history cannot be summed up in a single aggregate number. Financial history is particularly important for businesses that are seeking loans, lines of credit, investments and strategic alliances with other companies. Financial history consists of such things as revenue flows, financial growth, acquisition of assets and achievement of financial goals. Even without a substantial credit history -- which depends heavily on the borrowing of money and the repayment of debts -- a company can often use evidence of a solid financial history as a bargaining tool. For instance, when a venture capital firm is looking for companies to invest in, it will give more credence to companies that can prove a history of financial stability and growth.
  
  

Value-at-Risk Calculation

• A concrete way of calculating financial risk, particularly when investing in publicly traded securities, is by measuring the value-at-risk. Investors and portfolio managers do this by calculating, usually at a 95 percent level of confidence, what the highest possible loss of an investment would be. To measure success after your risk has already been taken and you have already collected on the investment, take your amount of profit and divide it by the value-at-risk calculation. If this number is higher than 100 percent, you can conclude that this was a safe investment.
  
  

Scenario Analysis

• Another method of financial risk measurement used by investors and portfolio managers is scenario analysis. In this calculation, they try to protect against negative anomalies by considering possible developments in the ecological, social and political spheres and determine how detrimental these events would be to investments in a worst-case scenario. For instance, someone who invests in commodities from South America would need to calculate the financial harm a revolution in Colombia could pose to him.