Risk Management

Risk management is a process of identification and evaluation of risk with the following selection of course of actions proceeding from available alternative scenarios of further events. Target function is a reduction of dispersion of company value (but not maximization of company value). It could be characterized with the following aspects:

 

  • Identification of risk: What potential risks are caused by the current action/inaction, the current transaction?
  • Assessment of risk amount and construction of risk profile – What exactly is the risk amount caused by the current transaction? What specific risk may be suffered as a result of this transaction?
  • Specification of available alternative scenarios of further events – No alternative – no action. Principle of conscious inaction – except those cases when a company for some reasons cannot avoid risks at all
  • Is it worth the risk at all? How this risk is associated with expected benefit? There should be no less than 3:1 odds
  • Can we allow ourselves such risk amount? Be afraid of losses, and profits will follow.
  • General determination of insurance associated with the costs and risk avoidance costs as a refusal from future incomes
  • Making a decision (selecting a of course of action), performance and control
  • Analysis of earlier performed actions or in-actions in historical retrospective

 

Arbitrary operations and hedging operations:

Trading is a business, a great business, but it is nothing more than a business, and should be regarded primarily as such. You do not have to be a genius or to have special numerical abilities to be successful in trading. Trading is not a science, art or religion. It is only a discipline, necessitating a conscious orientation to do the same thing again and again. There is no other business in the world similar to trading.