Finance School of Management Risk management The process of formulating the benefit-cost trade- offs of risk reduction and deciding on the course of tion action to take The appropriateness of a risk-management decision should be judged in the light of the information available at the time the decision is made Skill and lucky in risk management uesTc
6 Finance School of Management Risk Management ❖ The process of formulating the benefit-cost tradeoffs of risk reduction and deciding on the course of action to take. − The appropriateness of a risk-management decision should be judged in the light of the information available at the time the decision is made. − Skill and lucky in risk management
Finance School of Management Risk exposure Particular types of risk one faces due to ones circumstances job, business, and pattern of consumption, etc Ⅲ ustrations the risk of a crop failure and the risk of a decline in the price for a farmer the risks of fire, theft, storm damage earthquake damage f or a house owner the currency risk for a person whose business involves imports or exports of goods uesTc
7 Finance School of Management Risk Exposure ❖ Particular types of risk one faces due to one’s circumstances (job, business, and pattern of consumption, etc.) ❖ Illustrations – the risk of a crop failure and the risk of a decline in the price for a farmer – the risks of fire, theft, storm damage, earthquake damage for a house owner – the currency risk for a person whose business involves imports or exports of goods
Finance School of Management Speculators and Hedgers Hedgers: taking positions to reduce their exposures Speculators: taking positions that increase their exposure to certain risks in the hope of increasing their wealth .o The riskiness of an asset or a transaction cannot be assessed in isolation or in abstract uesTc
8 Finance School of Management Speculators and Hedgers ❖ Hedgers: taking positions to reduce their exposures. ❖ Speculators: taking positions that increase their exposure to certain risks in the hope of increasing their wealth. ❖ The riskiness of an asset or a transaction cannot be assessed in isolation or in abstract
Finance School of Management Risks Facing Households Sickness, disability, and death Unemployment Consumer-durable asset risk .o liability risk Financial-asset risk uesTc
9 Finance School of Management Risks Facing Households ❖ Sickness, disability, and death ❖ Unemployment ❖ Consumer-durable asset risk ❖ Liability risk ❖ Financial-asset risk
Finance School of Management Risks Facing Firms Production risk and red risk Price risk of outputs Price risk of inputs uesTc 10
10 Finance School of Management Risks Facing Firms ❖ Production risk and R&D risk ❖ Price risk of outputs ❖ Price risk of inputs