The Risk Management process
Machiavelli once said, keep your friends close and your enemies closer. If we start with the definition of ‘Risk’, we must identify first that ‘Risk’ is not a hazard. A hazard, is a key contributor to ‘Risk’, but it is not ‘Risk’ itself. We have to keep an open mind, and think that ‘Risk’ can contribute to either Loss or Reward. ‘Risk’ should not be avoided but should be identified, quantified, measured, and managed, as to avoid unexpected loss. Risk Management strives to identify risk factors, and then use statistical analysis to calculate probabilities that an unexpected loss might occur. One key statistical measure is Var (Value at Risk), this technique quantifies the level of financial risk over a time frame.
The Risk Management Process
Intelligent Risk-Taking involves Risk Management to analyze Risk in relation to Reward; and to do this, Risk Management follows the process of: Identifying Risk Exposures, measure and estimate risk exposures and asses effects, find instruments to shift or trade risk and assess costs of such instruments, then form a risk mitigation strategy, and evaluate performance.
