Финансовая среда предпринимательства, предпринимательские риски. Учебное пособие

Consider now in detail the special features of each method. Risk avoidance

a) Avoidance of risk

On the next slides we will look in detail the method definitions, its disadvantages and conditions of use

1.The essence of risk avoidance is to create loss-free economic conditions

2.Conditions for application of the method

3.Shortcoming of the method – giving up profit associated with risky activities

b)The essence of risk avoidance is to create loss-free

economic conditions

1.Discontinuation of production causing a risk

2.Giving up risky business areas

3.Selection of new risk-free activities

c)Condition for application of the method

1.Giving up one type of risk should not lead to other risks

2.Risk level is too high

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The main task is to find sources of necessary resources to cover the possible losses.

There are two methods of risk retention – risk acceptance with all financial implication and self-insurance.

The main task is to find Risk retention sources of required resources

to cover possible losses

Fig. 5.3

Risk acceptance with unpredictable financial implications. Risk acceptance - with all financial implication:

-consolidation of “economically dangerous” zones venture capital;

-balancing of assets and liabilities;

-rationing methods;

-system of coordination in decision –making process.

Risk acceptance - with all financial implications

-consolidation of “economically dangerous” zones venture capital;

-balancing of assets and liabilities;

-rationing methods;

-system of coordination in decision – making process.

Fig. 5.4

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Self-insurance - Establishment of risk funds, or isolated loss-recovery funds at the expense of some part of working capital.

1.Further , we will move to the third risk management group, namely risk reduction methods

2.In the beginning we give a definition of this group and the main directions of it’s impact

3.Then we will consider in detail such methods as diversification, limitation and increasing information level

Fig. 5.5

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There are several varieties of diversification

Diversification –

1.Diversification of business is the use of alternative sources of income from various activities.

2.Diversification of the securities portfolio is optimization of the set of shares, reducing investment risks but not reducing the level of income.

3.Diversification of direct investment programs is to minimize the probability of big losses.

4.Diversification of credit portfolio allows to minimize the credit risk.

5.Diversification of currency baskets allows to minimize currency risks due to selection of several currencies.

6.Diversification of the financial market is organization of work on several segments of financial market.

7.Vertical diversification is the allocation of resources among different types of activities.

8.Territorial diversification is distribution of resources among different business entities.

Methods of risk treatment

Limitation of the concentration of financial risk-means the

Limitations establishment of a system of regulatory limitations to reduce risk

degree

Fig. 5.8

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Limitation –

1.Limitation by period of investment of borrowed funds, etc.

2.Limitation by structure – the share of individual costs in the total volume, the share of each type of securities in the total value of the portfolio, the share of preferential stock in the total volume of the emission, the share of borrowed funds used in economic activities, etc.

3.Limitation by efficiency - establishment of minimum level of profitability of the project, etc.

Methods of risk treatment

Transfer of risk - Means the transfer of the responsibility for risk to third parties while maintaining the current level of risk.

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Insurance

Insurance – a common method of reducing risk degree by transferring financial responsibility for the risks to the insurance company for a fee in the following insurance cases:

1.Bussiness interruptions

2.Unexpected expenses

3.Breach of contractual obligations by insured party

4.Legal expenses incurred by insured party

Methods of risk treatment

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Fig. 5.13

Hedging using options allows neutralizing financial risks coming from operations with securities, currency, real assets:

1)Hedging with the right to buy at a specified price;

2)Hedging for sale at an agreed price;

3)Hedging on the basis of a double option that gives synchronous right to buy or sell relevant papers at a specified price.

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