Managing financial risk

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There is an element of risk in an activity when the outcome cannot be predicted with any certainty, or when the outcome is known but its full consequences are not. As individuals we have widely different attitudes to taking risks. For example, it is possible to identify three different positions. The risk lover – Someone who enjoys a gamble, even when mathematical analysis shows that the odds are unfavourable.The risk-neutral person – Will gamble only if the odds on a gain are favourable. The person will not be concerned with the range of possible outcomes, only with the odds being in their favour.The risk-averse person – Will gamble only if the odds are strongly favourable. Organisations also take risks. Some are prepared to take large risks and stand or fall by their ability to choose the right outcome – many of them fail. More typical organisations will take calculated risks. For example, insurance companies calculate insurance premiums on the basis of detailed statistical tables. Financial institutions have to be very careful because they are dealing with funds which have been entrusted to them for safe keeping. For example, customers who deposit money in a bank account would be horrified if…

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