TECHNIQUES IN HANDLING RISK


TECHNIQUES IN HANDLING RISK
Risk Transfer
Risk transfer is another technique for handling risk. Risks could be transferred by several methods, among which are the following:
(a) Transfer of risk by contracts;
(b) Hedging price risks; and
(c) Conversion to Public Limited Company.
Transfer of risk by contracts
Unwanted risks could be transferred by contracts. For instance, the chance of a defective television or stereo set could be used in the retailer by purchasing a site contract, making the retailer responsible for all repairs after the warranty expires. The risk of a substantial escalation in rent could be used in the landlord by way of a long-term lease. The risk of a substantial price escalation in construction costs could be used in the builder by having a firm price in the contract rather than a cost-plus contract.
Hedging price risks
Hedging price risks is another example of risk transfer. Hedging is really a technique for transferring the chance of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange, such as NSE.
Lately, institutional investors have sold stock index futures contracts to hedge against adverse price declines in the stock market. This technique is frequently called portfolio insurance. However, it's not formal insurance but is really a risk transfer technique that provides considerable protection against a decline in stock prices.
Conversion to Public Limited Company
Incorporation is another example of risk transfer. If a strong is really a sole proprietorship, creditors for satisfaction of
debts can attach the owner's personal assets, along with the assets of the firm. If a strong incorporates, however, creditors for payment of the firm's debts cannot attach the private assets of the stockholders. In essence, by incorporation, the liability of the stockholders is limited, and the chance of the firm having insufficient assets to cover business debts is shifted to the creditors.





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