19 Apr Risky Business
In his article, Ian assesses the pros and cons of RISK in the game of finance. Many see it as a negative situation to avoid, but to others, RISK is a opportunity to be seized. Read on to discover what could be waiting around the corner for you if you’re ready!….
If you don’t have time to read now, you can download the file at the bottom of the page when you’re ready for some risky business!
Risky Business – A Tom Cruise Event!
A blog written by Jeremy Lomman (https://jlofbalak.blogspot.com.au/2013/03/risky-business-is-good-business.html) inspired me to extend my thoughts on Risky Business.
At an individual level risk is perceived with such a diverse spectrum of expectations and outcomes, rational or otherwise, that ultimately drive behaviour and commercial outcomes.
To some, risk may be interpreted as a simple event of being caught with your pants down in the board room singing old time rock n roll, to the probability of a Philippine militia coup coinciding with a tropical cyclone affecting the export status of semi-conductors to the States. Risk, on the whole, is nurtured within the mental framework as a negative. It poses downside threats to all levels of personal and professional activities. But to the astute business operators risk presents as an opportunity.
Let us explore this phenomenon further. Pricing of assets, investment decisions, operational activities are all business initiatives founded on the information current at the prevailing moment in time. Portfolio Theory & its related Hypothesises announce that all information is current, timely, accurate and accessible to everyone at every given time, and that this information is acted upon rationally. If this is true, then the price for risk is accounted for and continuous. This is clearly not the case. The GFC event saw a monumental shift in pricing for risk that was far from incrementally continuous. Risk is poorly assessed.
For those who can identify and price risk more accurately (above those who represent the masses that determine the price for risk) can effectively arbitrage the market and make sustainable and above market returns.
This holds true in business. Business operates in an extremely competitive environment. To be successful does not necessarily mean being the “best” in your industry in order to make a satisfactory return on the risk. Instead, it is a function of being astute in assessing the risks inherent within the peripheral boundaries of your business over and above that of your peers, and to then structure (and price) your business around these identifiable risks.
What are the risks?
From a financial perspective these could be summarised within the following categories;
Basic risk, capital risk, country risk, default risk, delivery risk, economic risk, exchange rate risk, interest rate risk, liquidity risk, operations risk, payment systems risk, political risk, refinance risk, re-investment risk, settlement risk, sovereign risk and underwriting risk.
Sounds onerous, but once the risks are identified, they can be analysed, assessed and converted into the opportunity your business seeks to stretch the financial performance beyond that of your peers and to make sustainable and profitable returns.
Director – Corporate and Agri Finance
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