Risk management of financial engineering is a systematic approach to the discovery and management of risk. The goal is to minimize the concern before crippling potential losses.
The process includes:
Step 2: Measurement
Step 3: Method
Step 4: Administration
Identification of Risk
Identifying Potential Losses that May Cause Serious Financial Problems
(1) Losses – Replacement or Repair and Indirect Loss , which requires additional costs as a result of the loss.
(For example, damage to the car results in the cost of repairs and additional costs incurred when repairs to the car).
(2) Liability – Losses from other personal injury or property damages.
(For example, due to a motorway accident due to public loss).
(3) Personal Injury – The earning power suffered as a result of death, disability, sickness or unemployment, as well as additional costs of injury or illness.
After that, the maximum possible loss (1) Property Risk – To Replace a Damaged Device or repair costs can be estimated by a similarly comparable means at the present value and the likelihood of the event occurring (ie the frequency) should be quantified
. The indirect costs of alternative measures such as accommodation, food, transport, etc. should be taken into account.
(2) Liability Risk – This shall be considered to be unlimited as it depends on the severity of the event and the amount of court proceeds from the injured party.
(3) Personal risk – Estimating the present value of expected life costs and annual incremental costs by a predetermined annual calculation with some assumed interest rates and inflation
Risk Management Methods
Combination of all or more techniques, used to treat the risk.
(1) Avoidance – Complete termination of activity.
This is the most powerful technique, but the hardest and sometimes impossible. In addition, care must be taken to avoid creating any risk.
(For example, to avoid flying risks, never fly on the airplane.)
(2) Segregation – Separation of risk.
This is a simple technique that involves not placing all eggs in a basket.
(For example, to avoid the death of both parents in a car accident to travel with separate vehicles.)
(3) Duplication – There are more than one.
This technique requires additional backups.
(For example, to avoid losing a car, use 2 or more cars.)
(4) Prevention – Take the danger.
This technique aims to reduce the frequency of loss.
(For example, to prevent fires, keep your children away.)
(5) Reduction – Reduce the size of the loss.
This method serves to reduce the severity of loss and can be used before, during or after loss.
(For example, reducing losses due to fire, installing smoke detectors, sprinklers, and fire extinguishers.)
(6) Retention – Independent Risk Taken.
This technique involves the conscious or more dangerous keeping of risk unconsciously for the financing of its own loss.
(For example, if you earn 6 months of revenue in savings against the risk of unemployment.)
(7) Transfer – Insurance.
This technique passes the financial consequences to another party.
The Methods To Apply
And Finally To Complete The Process Loop, The New Risks Must Be Continuously Identified, And All risk should be re-measured if necessary. Alternative treatments should also be reviewed.
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