Throughout our lives, we are continuously managing risks – either during basic duties (such as driving automobiles) or while making new insurance or medical arrangements. In essence, risk management is all about analyzing risks and adapting to them.
The Meaning of Risk Management
Risk management according to Wikipedia is the identification, evaluation, and prioritization of risks followed by the coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities
During daily tasks, most of us handle them unconsciously. This approach is a critical and very aware practice when it comes to financial markets and business administration. In economics, risk management can be defined as the structure that determines how financial risks that are inherent to all kinds of companies are managed by a company or investor. The system can include the management of multiple asset groups, such as commodities, bonds, indices, and real estate for investors.
Several kinds of financial risks can be categorized in different ways. In this article, we will give an overview of the process of risk management. Also, we will introduce some strategies which can help mitigate financial risks for traders and investors.
We will start by illustrating how risk control works. The risk management process usually includes five steps.
- Setting targets
- Identifying threats
- Evaluating the threats
- Defining answers
- Tracking / regular observation
The Risk Management Process
The risk management process captures and manages emerging risks and updates previous risk analysis to reflect new information, reflecting the dynamic nature of project activity. Listed below are few steps and proper process to risk management.
The first step is to determine what the key priorities are. It is also linked to the organization or individual’s risk perception. In other words, this point states how much danger they are prepared to take to move towards their objectives.
The second step is to detect and describe the possible hazards. It seeks to expose all kinds of accidents that can cause adverse effects. This move may also provide insightful knowledge in the company setting that is not directly linked to financial risks.
Evaluating the Threats
The next step, after defining the threats, is to determine their expected frequency and severity. The threats are then graded in order of priority, which makes it easier for an appropriate answer to be produced or adopted.
The fourth step is to define answers, according to their level of importance, for each category of risk. It sets out what steps should be taken in the case of an unfavorable event.
Tracking / Regular observation
A risk management strategy’s final step is to closely observe its ability to produce desired results in response to incidents. This also calls for continuous data collection and analysis.
There are many reasons why a policy to mitigate risk could be ineffective. Examples are:
- Lack of Capital to Manage Risks
- Not Identify or Ignoring Risks
- Improper Risk Communication
- Improper Risk Assessment and Control
- Emotional responses
How to Mitigate Risks
There are various ways of managing risks, however, the methods should be constantly updated and adapted. Listed below are 5 key approaches to mitigating risks
- Constant Evaluation of Business
- Efficient and Knowledgeable Risk Management Team
- Strong Management Practices
- Ensure accurate Metrics are used to arrive at all Decisions
- Be prepared to cover a Loss
It is important to consider developing a risk management plan. Also, note that total financial risk elimination is possible. Financial risk management determines how risks should be managed, but it’s not just about risk reduction. Strategic analysis is also included in this so that the inevitable risks can be taken as quickly as possible. In other words, according to context and policy, it is also about recognizing, evaluating, and tracking threats. The risk management method is aimed at determining the risk/reward ratio to prioritize the most desirable positions.