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Sunday, September 5, 2010

Risk Management

Risk indicates a future event with a probability of occurrence that could cause an additional cost or a reduced revenue for a portfolio.

In a trade where the producer with stock in hand selling the product directly to a consumer who is buying the product for cash, there is no risk involved.

But, when a producer is selling the product to a consumer on a monthly installment basis, producer evaluates and manages a possible "credit risk".
Similarly when a consumer is paying cash in advance for product that will be delivered later, the consumer is evaluating and managing the "operational risks" of the producer.

When the transaction do not involve either producer or consumer and dealt by the "traders" then the risk is on its peak! When a trader purely buys a commodity or an instrument for the sake of selling it for profit in future and not for his own consumption; then it calls in for a methodical evaluation and management of "RISK".

In the modern day markets, there are multiple layers of traders and exchanges that are involved, making the "risk management" highly complex. There are spot, index based, options and future contract type trades that happen in the financial and commodity sectors, which made "risk management" a key tradition in the trading business!

We have several mathematical simulation models and supporting IT solutions in the Trading Risk Management models today. Several organizations are in the process of implementing and modernizing the "risk management" solutions to make their business make better sense.

But there is a "risk" in choosing and implementing the right "risk management" solution itself. How to manage that risk? Sounding tricky??

Warren Buffet's quote on this goes like this: "Risk comes from not knowing what you're doing." Taking this simple guiding principle, one can tackle the risk easily!

The impact of risk can be surely reduced by right KNOWLEDGE of what is being done! If you do not have the right knowledge, transfer the risk to someone who has the right knowledge!

Personally, I have successfully transferred all the risks to the most knowledgeable one thereby became completely risk free!
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