Basic methods of risk management, Financial Management

Assignment Help:

Q. Basic Methods of Risk Management?

Risk is inherent in business and hence there is no escape from the risk for a businessman. However, he may face this problem with greater confidence if he adopts a scientific approach by dealing with risk. Risk management may, therefore, be defined as adoption of a scientific approach to the problem dealing with risk faced by a business firm or an individual. broadly, there are five methods in general for risk management.

1) Avoidance of Risk: A business firm can avoid risk by not accepting any assignment or any transaction which involves any type of risk whatsoever. This will naturally mean a very low volume of business activities and losing of too many profitable activities.

2) Prevention of Risk: In case of this method, the business avoids risk by taking appropriate steps for prevention of business risk or avoiding loss, such steps include adaptation of safely programmers, installation of burglar alarm and extinguisher, employment of night security guard, arranging for medical care and disposal of waste material etc.

3) Retention of Risk: In case of this method, the organization voluntarily accepts the risk since either the risk is insignificant or its acceptance will be cheaper as compared to avoiding it.

4) Transfer of Risk: In case of this method, risk is transferred to some other person or organization. In other words, under this method, a person who is subject to risk may induce another person to assume the risk. Some of the techniques used for transfer of risk are hedging, sub-contracting, getting surety bonds, entering into indemnity contracts etc.

5) Insurance: This is done by creating a common fund out of the contribution (known as premium) from several persons who are equally exposed to the same loss. Fund so created is used for compensating the persons who might have suffered financial loss on account of the risks insured against.


Related Discussions:- Basic methods of risk management

What do you mean by average cost and marginal cost, Q. What do you mean by ...

Q. What do you mean by Average Cost and Marginal cost? Average Cost and Marginal cost: the average cost is the combined cost as explain above, but for the difference in the for

Show maximum opportunity cost, Q. Show Maximum opportunity cost? If Mar...

Q. Show Maximum opportunity cost? If Marton hedges all its awaited dollar income over the next year at US$1.55: £l this will make guaranteed (ignoring other sources of risk) st

Explain the term - yield to call, Illustrate the process of calculating cal...

Illustrate the process of calculating call/ put options yields Issuing corporation will use provision if interest rates fall substantially below coupon rates offered on the se

Floor Brokers, Floor Brokers These people have the responsibility of ex...

Floor Brokers These people have the responsibility of executing the trades forwarded by the FCMs on the floor of the exchange. They can also trade for their own account. They w

Determine marginal tax rate, Q. Determine marginal tax rate? Ans. ...

Q. Determine marginal tax rate? Ans. Henkel does not carry debt beyond five years. To determine the cost of debt: a. For Henkel AG, which Treasury rate at which maturit

Bond indenture, Bond Indenture An indenture builds the formal conditio...

Bond Indenture An indenture builds the formal conditions of a lending relationship between a borrower and a lender. It is a written record, and it outlines most important func

Time value of money, In order to provide for R10 million to build a new war...

In order to provide for R10 million to build a new warehouse in 5 years time, a company plans to make equal payments at the end of each six months into a fund which earns 9% per ye

What is the meaning of statement- earn out arrangements, What is the meanin...

What is the meaning of statement- Earn out arrangements These arrangements take place during acquisition of another company. Parent company agrees to pay additional money if

Constructing the theoretical spot rate curve for treasuries, The following ...

The following treasury issues can be included for the construction of the curve: On-the-run treasury issues. On-the-run treasury issues and sele

Brigham, how do legal consideration affect a firms credit policy

how do legal consideration affect a firms credit policy

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd