Methods of financial risks neutralization
Avoiding risk is to develop domestic action character which completely exclude a particular type of financial risk. These measures primarily include the rejection of financial transactions with excessively high levels of risk. But at the same time, while the company lost planned revenue and profit from operations, ie the risk of loss of profits.
To avoid certain types of financial risks can be used by specific measures to neutralize the very causes of the risk situation. So, to neutralize the risk of losing financial stability should give up excessive debt financing. To avoid the risk of insolvency should refrain from creating unnecessary illiquid assets.
Deposit and interest rate risks can be avoided by not depositing money in deposit accounts and their investments in short-term securities (but there is a risk not only profits, but also inflation risk).
Diversification of financial risks is to reduce their level of concentration. This method of risk management used only to avoid the negative consequences of unsystematic (specific) risks that depend on the enterprise. Whether that risk is minimized by means of diversification, risk management principles only - as to distribute money between different investment assets in order to avoid significant financial losses when the individual assets become unprofitable by external and internal factors.
Depending on the specific areas and activities the company can use diversification to reduce these types of risk:
- Production risk (diversification of activities and range of products);
- The risk of deposit (the deposit portfolio diversification by placing free cash balances not one, but several banks);
- Credit risk (diversification of loan portfolio by offering deferred payments greater range of buyers of products while limiting the amount of loan per client);
- Currency risk (currency diversification of the portfolio by forming a "currency basket" to avoid the risk of currency choice);
- The risk of financial investments (portfolio diversification by type of financial instrument, maturity investments, industries and regions of the issuers, etc.);
- The risk of real investment (portfolio diversification in terms of investment projects, regions, industries and so on. Al.).
However, diversification does not exclude the possibility of financial losses in the event of changes in the political and economic situation, legislation, market conditions, rising inflation and others.
Limitation by setting appropriate financial standards (limits) in certain areas of financial activity with the aim of possible financial losses for acceptable for the enterprise level. The list of standards (limits) depends on the type of risk that is limited.
In practice, risk management is often limited by the following types of financial risks:
- The risk of losing financial stability (by setting the maximum amount and proportion of debt at different stages of the life cycle of the enterprise);
- The risk of insolvency (by limiting the minimum amount of assets and shares as ready means of payment and highly liquid financial instruments);
- Credit risk (by setting the threshold of commercial (marketable) loan per client and the maximum possible amount of receivables the company considering the amount of reserve capital formed);
- Deposit risk (by setting the maximum value the contribution that can be placed in a bank);
- Investment risk (by limiting the maximum amount of investments in securities of one issuer).
Hedging financial risks involves reducing the probability of their occurrence by using derivatives or derivatives (futures, options). The mechanism of hedging is to conduct financial transactions with opposite f'yuchers- their contracts and options on commodity and stock exchanges.
In the case of hedging using options possible amount of financial loss is limited to the level of premium (option price). Payment of bonuses makes choice: carry out the operation on predetermined conditions or abandon it and thus neutralize the risk.
Risk allocation is done by the partial transfer of risk to individual partners involved in carrying out risky operations.
Typically, the contractors sent the risks that depend on them.
Terms distribution of risks regulated by relevant agreements. With distribution can minimize these risks:
- Investment risk (contractors by transferring the risks associated with the construction, banks - risks associated with the timely credit, etc.)
- Commercial risks (by transfer of the suppliers of raw materials risks related to its possible losses during delivery);
- Production risks (the application of operational leasing leasing company transferred the risk of physical depreciation of fixed assets);
- Credit risk (if refinancing receivables via factoring, bills discounting, forfeiting the risk of default of debt transferred to the bank or factoring company).
The methods of prevention allow to reduce the probability of financial risk, but does not create special funds and reserves to offset potential financial losses when risky event occurred. Such a role for insurance (domestic and foreign).
Internal security is now in formation of risk capital in the form:
- Reserve fund;
- Special-purpose reserve funds (fund markdown goods, sinking fund uncollectible accounts receivable, etc.);
- Reserve items in the current and capital budgets;
- Insurance reserves for certain types of current assets;
- Balance of retained earnings of the past and the year.
In addition, partial compensation for possible losses may be obtained by penalties and by requiring additional return (risk premium) from contractors for a high level of risk.
If the existing reserves of their own money is not enough to compensate for possible financial losses, keep inappropriate risk. It is better to pass the insurance company. In the case of external financial risk insurance manager must justify appropriate for an enterprise value between the insurance premium (pay for insurance risk) and the sum insured (the amount of insurance compensation under the insurance contract). It should take into account the size of the deductible - the minimum amount of the insured loss that is not compensated by the insurer.