.Practice of creating economic value in a firm by using financial instruments to manage exposure to risk. ‡ It involves assessing the financial risks facing an organization and developing management strategies consistent with internal priorities and policies.


RISK MANAGEMENT TECHNIQUES Risk Avoidance Risk reduction Risk retention Risk combinati on Risk transfer Risk sharing Risk hedging Loss prevention Loss control .

person.One of the simplest and dramatic ways to manage risk is to avoid the activity. Proactive Avoidance Reactive Avoidance . property etc.

.‡ Risk can be avoided in two ways:  by changing activity  by changing process or location.

 It is the relative cost and benefits associated with each loss control tool that decides the choice  While analyzing the likely costs and benefits one should bear in mind that loss control mechanism is always used in conjunction with either risk retention or risk transfer . it should explore the possibility of implementing the available loss control measures. Once an organization concludes that it cant avoid certain risks.

the techniques used in capital budgeting decision making can as well apply to choose a particular loss control tool for risk management .when the individual or organisation is exposed to risks of different kinds. he/she should find out a method to control the loss that may result out of identified risks.

Helps in weeding out risky projects.TECHNIQUE PAY BACK PERIOD MEANING Measures the length of time required to recover the initial outlay in project ADVANTAGES -Simple in concept and application. .payback period is chosen arbitrarily -Ignores time value of money -Depends on accounting income and not on cash flows ACCOUNTING RATE OF RETURN Average profit after -Simple in concept tax/average book and application value of investment -Considers returns over the entire life of project Difference between present value of cash inflows and outflows Net present value . DISADVANTAGES -Don t consider time value of money .

Technique Meaning Advantages Disadvantages Internal Rate of Return Rate which equates -Recognizes the time the present value of value of money cash inflows with -considers all cash flows present value of over the entire life of the cash outflows project fails to indicate a correct choice between mutually exclusive projects -value additivity principle doesn t hold true .


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