Atabaev Fakhriddin mmt-81i Task 1 Formulate the pros and cons of each risk management method

Atabaev Fakhriddin
MMT-81i
Task 1
Formulate the pros and cons of each risk management method:
risk avoidance
Limiting the concentration of financial risks
Transfer of risk
Hedging
insurance
self-insurance
diversification

Risk avoidance
Pros
completely or nearly eliminates a risk that has the potential to damage the organization; and instills confidence that the organization will continue to operate because, with the risk eliminated, it won't have to plan for or contend with the negative consequences associated with the risk.
Cons
slows operations as employees, business partners and sometimes even customers adhere to the rules implemented to eliminate the risks; and
limits opportunities such as increasing sales, cultivating new customers and developing new revenue streams.
Limiting the concentration of financial risks
Pros
Concentrating or limiting the vendor pool might lead to volume pricing discounts resulting from bundled services. Rather than pay five separate vendors for different services, a single vendor may offer an attractive discount if you bundle everything together.
Cons
Bundled pricing may seem appealing at first, but this is often revealed to be a pricing strategy that benefits the vendor. The main product could be a loss leader so the vendor will upcharge the additional products or services to make up the difference. A savvy vendor manager or executive will be able to identify this strategy and understand what the true market pricing is on each product or service. 
Hedging
Pros
Futures and options are an excellent short-term and risk-minimizing strategy for long term traders and investors.
• Hedging tools can also be made use of for locking the profit. • Hedging facilitates traders to survive hard market periods.
• Successful Hedging provides the trader protection against commodity price changes, currency exchange rate changes, interest rate changes, inflation, etc.
• Hedging can also save a lot of time as the long term trader is not required to monitor his portfolio with daily market volatility.
• Hedging exercising options provides the trader an opportunity to practice complex options trading strategies to maximize his return.
Cons
• Hedging involves a cost that tends to eat up the profit.
• Risk and reward are usually proportional to one other; thus, reducing risk will lead to reduced profits.
• For most short term traders, e.g., for a day trader, Hedging is a complex strategy to follow.
• If the market is doing well or moving sidewise, then Hedging offers little benefits.
• Trading of options or futures often requires higher account requirements like more capital or balance. • Hedging is an accurate trading strategy, and successful Hedging requires good trading skills and experience.
Transfer of risk
Pros
The individual or company is safeguarded against any unforeseen future risks
It helps in covering the financial losses at least to the extent of policy coverage
It saves the person from unexpected and huge financial burdens by paying a small amount
The clauses are mostly standard and thus does not bring in ambiguity in claims
The terms are fixed and are not subject to any changes in market conditions
Cons
It creates an additional expense for the asset holder
It comes with limited coverage
The additional cover requires additional expense
The company, to which risk is being transferred, needs to be solvent
The company takes time to settle the claims
In certain cases, it is mandatory to follow a risk transfer mechanism
Insurance
Pros
Financial Support
Insurance Decreases Risks
The Stability of the Living Standard
Motivation for Savings
Jobs Opportunities
International/foreign Trades
Loan Facilities
Stability of Business
Specialization
Tax-Free Funds
Cons
Insurance Has Many Terms and Conditions
Long and Costly Legal Procedures
Fraud Agency
Not for all People
Potential Criminal Activity
Increases Cost
Additional Fees
Professionalism Gap
Insurance Broker Focusing to Close the Sale
Limited Offers
Self-insurance
pros
Cost savings

Tailored coverage options

Increased cash flow

Control over claims process

Cons

Financial risk

Administrative burden

Unpredictability of losses

Diversification
Pros
Risk Management
Align With Your Financial Goals
Growth Opportunity

Cons
More Investment Means More Mistakes Can Be Made

Different Rules For Different Assets
Tax Implications
Cost of Investment
Capping Growth