Risk management is a process of identification and evaluation of risk with the following selection of course of actions proceeding from available alternative scenarios of further events. Target function is a reduction of dispersion of company value (but not maximization of company value). It could be characterized with the following aspects:
- Identification of risk: What potential risks are caused by the current action/inaction, the current transaction?
- Can we allow ourselves such risk amount? Be afraid of losses, and profits will follow
- Assessment of risk amount and construction of risk profile - What exactly is the risk amount caused by the current transaction? What specific risk may be suffered as a result of this transaction?
- General determination of insurance associated with the costs and risk avoidance costs as a refusal from future incomes
- Specification of available alternative scenarios of further events - No alternative - no action. Principle of conscious inaction - except those cases when a company for some reasons cannot avoid risks at all
- Making a decision (selecting a of course of action), performance and control
- Is it worth the risk at all? How this risk is associated with expected benefit? There should be no less than 3:1 odds
- Analysis of earlier performed actions or inactions in historical retrospective
Arbitrary operations and hedging operations:
Trading is a business, a great business, but it is nothing more than a business, and should be regarded primarily as such. You do not have to be a genius or to have special numerical abilities to be successful in trading. Trading is not a science, art or religion. It is only a discipline, necessitating a conscious orientation to do the same thing again and again. There is no other business in the world similar to trading.