The risk management strategy is one of the most important parts of trading says Peter DiCaprio . After determining the risks and accessing the possibility of happening, you will identify the outcome and the consequences associated with the risks. This will help you decide possible approaches to treat them properly. The approach you choose to mitigate the risks is known as a risk management strategy. The strategy is also referred to as risk treatment.
You need to know three primary risk management strategies: risk acceptance, risk transference, and risk avoidance.
When choosing the relevant one, you can easily differentiate between facing severe consequences and effectively managing the potential risks. Let’s discuss the different types of risks management strategies.
Risk Acceptance
Risk acceptance is known as the risks that are accepted with no appropriate actions to mitigate them.
This strategy will decrease the severity of the risks or even prevent them from happening in the first place. However, this is not a bad thing. Sometimes, you might end up spending more money to mitigate the risks than the risks themselves. In such cases, it’s best to accept the risks. After all, it’s not suggested to spend $100,000 to prevent a $10,000 stake.
But keep in mind that risk acceptance comes with a gamble. You need to ensure that if the risks occur in the future, you can deal with them appropriately. Due to this, Peter DiCaprio suggests you accept the risks that have low chances of severity.
Risk Transference
Risk transference is the strategy where the risks are transferred via contracts to the external parries who will assume the risks on behalf of the organizations.
However, going with the risk of transference doesn’t mean you can eradicate them. The risks will exist. But instead of handling them on your own, you’re transferring the responsibilities from your organization to another.
For instance, let’s consider travel insurance. You will face various risks while traveling, such as lost suitcases or unfortunate accidents. In such cases, you pay the travel insurance company so that they can bear the financial consequences for you. The same is also applicable to your professional workspace.
Risk Avoidance
Risk avoidance is the strategy where the risks can be prevented by not taking proper actions that would mean the risks would occur.
If you’re going with this strategy, you will be able to eliminate the possibility of risks. This means that you can prevent the risks from occurring in the first place, says Peter DiCaprio. One of the best examples of risk avoidance is an investment. For instance, after determining the risks associated with the investments, you identify the investment as too risky, and you do not invest in that particular sector.
While you reduce the severity of the risks by avoiding them, make sure you reserve this strategy for the risks that would cause a massive impact on your company or organization. However, if you avoid every risk, you might lose various opportunities to grow your organization. Sometimes, the investment you canceled might be a potential turning point for your organization.
Conclusion
You might wonder which risk management strategy is the best and perfect for your organization. Remember that the risks management strategy you choose is entirely dependent on the risks. You need to understand each risk thoroughly to select the appropriate plan.
