Vibhs Financials | Risk Management

Risk management is activity directed towards the assessing, mitigating (to an acceptable level) and monitoring of risks. In some cases the acceptable risk may be near zero. Risks can come from accidents, natural causes and disasters as well as deliberate attacks from an adversary.
In businesses, risk management entails organized activity to manage uncertainty and threats and involves people following procedures and using tools in order to ensure conformance with risk-management policies.
Risk management is also used in the public sector to identify and mitigate risk to critical infrastructure. For the most part, these methodologies consist of the following elements, performed, more or less, in the following order.
-identify assets and identify which are most critical -identify, characterize, and assess threats -assess the vulnerability of critical assets to specific threats -determine the risk (i.e. the expected consequences of specific types of attacks on specific assets) -identify ways to reduce those risks -prioritize risk reduction measures based on a strategy
The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk.
Some traditional risk management programs (e.g., health risk assessment) are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, ergonomics, death and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments.
Once the trader has decided the total amount of capital to be risked to trading, the next step is to allocate this amount across competing trades. The easiest solution is to allocate an equal amount of risk capital to each commodity traded. This simplifying approach is particularly helpful when the trader is unable to estimate the reward and risk potential of a trade. However, the implicit assumption here is that all trades represent equally good investment opportunities. A trader who is uncomfortable with this assumption might pursue an allocation procedure that:

Identifies trade potential difference
Translated these differences into corresponding differences in exposure or risk capital allocation.

Differences in trade potential are measured in terms of:
The probability of success
The reward/risk ratio for the trade

Arrived at by dividing the expected profit by maximum permissible loss, or the payoff ratio, arrived at by dividing the average dollar profit earned on completed trades by the average dollar loss incurred. The higher probability of success and higher the payoff ratio, the greater is the fraction that could justifiably be exposed to the trade.