Foreign Experience in Risk Reduction
American managers understand the risk of "chances of damage or loss due to the occupation of any business". They distinguish between two types of risk.
The first is the unavoidable risk , which you can take into account beforehand and shift to the shoulders of insurance companies. In addition to the risk of losses from earthquakes, fires and other natural disasters, they include risks of losses from dishonesty and negligence of employees of the firm, as well as from violation of obligations by partners, subcontractors and other business participants. Separately, the risks of suspension of business activity, risks of losses from death or illness of managers and employees of the enterprise are insured. All these risks are insured by an extensive network of insurance companies.
If you are insured against dishonesty of employees, you can purchase "honesty" bonds from the insurance company, and "partners" or subcontractors default bonds "guarantees".
The second kind of risk in business is associated with the inevitable uncertainty of the business process itself . This includes the risk of losses due to unpredictable changes in market demand and supply, fluctuations in stock prices and other securities, stock price games, etc. These causes are unrecoverable and can not be completely compensated by any insurance. The only way to protect yourself from the consequences of business uncertainty is to refuse to conduct it in case of unexpected or incomplete information.
American entrepreneurs take a number of measures associated with risk, for example: the organization of a qualified and well-equipped information service, engaged in studying the situation on the market, the state of competitors, consumer demand, the possibilities of scientific and technical progress; creation of the forecasting service, which allows the businessman to trace the development trends of the market, the emergence of new means of production, materials, technologies; the organization of reasonably-sufficient reservation of goods, production capacity, to avoid losses from sudden, sudden changes in market conditions.
In addition to these general measures, certain efforts are undertaken to reduce the risk. This is a thorough examination of projects; transferring part of the investment to other firms in order to shorten project implementation times; carrying out thorough, highly professional marketing activities; careful consideration of the possible effects of competition on the whole activity of the enterprise; optimization of the distribution of resources (money, personnel, raw materials, materials, transport capabilities, etc.); the establishment of a permanent system of control and material incentives based on the study of the motives of the work activity of each employee.
To reduce the risk of losses due to unforeseen economic and political shocks, natural disasters, environmental disasters, situational management should be provided in advance for these circumstances. Every manager and other employees of an enterprise should know what they should do in these situations.
To reduce the risk of business consequences from unforeseen changes in economic, labor and other legislation, there is a constant work to study not only the texts of existing documents, but also their theoretical basis, to predict the ways of their transformation, involving scientists, legislators, workers tax inspection, representatives of law enforcement bodies.
One of the most common methods of risk reduction in the United States is the so-called hedging (which means fencing against losses). The meaning of the hedge is that when concluding a contract for the sale of goods on the exchange, the bargain participants agree in advance on a certain quantity of goods at a strictly stipulated price. At the same time, payment and receipt of this amount are guaranteed, no matter what price fluctuations occur in the future within the specified period of time.
Hedging of all risks is the only way to avoid them completely. However, the financial directors of many companies prefer selective hedging. If they believe that exchange rates or interest rates will change unfavorably for them, then they hedge the risk, and if the move is in their favor - they leave the risk uncovered. This is, in fact, speculation.
One of the drawbacks of general hedging (ie, reduction of all risks) is the rather substantial total costs for commission brokers and premiums of options. Selective hedging can be seen as one way to reduce total costs. Another way is to insure risks only after rates or rates have changed to a certain level. We can assume that to some extent the company can withstand unfavorable changes, but when they reach the permissible limit, the position should be completely hedged to prevent further losses. This approach avoids the cost of risk insurance in situations where exchange rates or interest rates remain stable or change in a favorable direction.
Hedging financial risks by performing related transactions with derivative securities is a highly effective mechanism to reduce possible financial losses in the event of a risk event. However, it requires certain expenses for payment of commission to brokers, premiums on options, etc. Nevertheless, the level of these costs is significantly lower than the level of costs for external insurance of financial risks. A variety of forms of hedging financial risks have already become widespread in the practice of domestic risk management.
Depending on the types of derivatives used, the following financial hedging mechanisms are distinguished:
• hedging using futures contracts characterizes the mechanism for neutralizing financial risks from operations on commodity or stock exchanges by conducting counter transactions with various types of exchange contracts. A hedging operation using futures contracts requires the execution of three types of exchange transactions: 1) the purchase (sale) of a real asset or securities with delivery in a future period (forward exchange transaction); 2) the sale (or purchase, respectively) of futures contracts for a similar number of assets or securities (the opening of a position on futures contracts); 3) liquidation of a position on futures contracts at the time of delivery of a real asset or securities by performing a reverse (offset) transaction with them. The first two types of exchange transactions are carried out in the initial stage of neutralizing financial risk, and the third - at the stage of completion. The principle of hedging mechanism using futures contracts is based on the fact that if an enterprise bears financial losses due to price changes at the time of delivery as a seller of a real asset or securities, then it wins in the same amounts as a buyer of futures contracts for the same amount of assets or securities, and vice versa. In this regard, the mechanism for neutralizing the financial risks of this group distinguishes between two types of operations using futures contracts - hedging by purchase and hedging the sale of these contracts;
• hedging using options characterizes the mechanism for neutralizing financial risks from operations with securities, currency, real assets and other types of derivatives. This form of hedging is based on a deal with a premium (option) paid for the right (but not the obligation) to sell or buy, within the period stipulated in the option contract, a security, currency, real asset or derivative in a stipulated amount and at a predetermined price. In the mechanism for neutralizing financial risks using this type of derivative securities, a hedge is distinguished on the basis of: 1) an option to buy (granting the right to purchase at a specified price); 2) the option to sell (granting the right to sell at a specified price); 3) double option or "rack" (giving at the same time the right to purchase or sell an appropriate financial or real asset at an agreed price). The price that an entity pays for the acquisition of an option is, in essence, paid by an insurance premium;
• hedging using the "swap" operation characterizes the mechanism for neutralizing financial risks from transactions with currency, securities, debt financial obligations of the enterprise. At the heart of the swap operation is the exchange (purchase-sale) of the relevant financial assets or financial liabilities in order to improve their structure and reduce possible losses. In the mechanism for neutralizing financial risks using this form of hedging, the following operations are used: 1) currency swap (exchange of future liabilities in one currency for corresponding obligations in another currency); 2) stock swap (the obligation to convert one type of security into another, for example, circulating company bonds into shares issued by them); 3) interest rate swap (exchange of debt financial liabilities of an enterprise with a fixed interest rate for liabilities with a floating interest rate, or vice versa).
In the process of hedging financial risks, it is necessary to compare the value of the hedge with the amount of reduction of possible losses for these risks. Together, these two indicators form the effectiveness of hedging operations. The effectiveness is determined by the following formula:
where ЭХр - coefficient of effectiveness of the hedging of financial risk; SPr - the amount of reduction of possible losses on financial risk as a result of hedging; Cx is the total cost of all hedge costs.
Based on this formula, the effective hedge », the hedge efficiency coefficient over which is greater than one is determined. Based on the market hedging options based on the ratio considered, the hedger can choose the "optimal hedge", which for a unit of hedge value allows to obtain the maximum amount of reduction of possible losses on risk}.
The enterprise plans to make payments in the amount of $ 10,000 in three months. Spot-course - 15 rubles. for $ 1, forward rate - 16.5 rubles. for $ 1. The exercise price of the currency option call is 16.5 rubles, the premium is 30 kopecks. for $ 1. Current rate in three months - 17.8 rubles. for $ 1
Define the results:
1) failure of the enterprise to hedge;
2) hedging with the forward transaction;
3) hedging with an option.
1) Failure to hedge (without hedging). In three months, the enterprise will need 17.8 × 10 000 = 178 000 rubles. (rate in three months, multiplied by the amount of the transaction) to fulfill the obligation, i.e. it loses
2) Hedging with forward transaction. In three months, the company will need 16.5 × 10 000 = 165 000 rubles. (forward rate multiplied by the amount of the transaction) for the performance of the obligation, i.e. in comparison with the hedge failure, the enterprise wins
3) Hedging with an option. The premium will be 0.3 x. 10 000 = 3000 rubles. In three months, the company will need 16.5 × 10 000 = 165 000 rubles. (the price of execution of a currency option multiplied by the amount of the transaction). Compared to the hedge failure, an enterprise taking into account the premium also wins
178 000 - 165 000 - 3000 = 10 000 rubles.
Thus, the best option is to hedge with the forward transaction, since the company receives the largest amount of the winnings - 13 000 rubles.
A common way to reduce risk losses is in the US self-insurance method . The firm in case of losses creates a special reserve fund, intended for their reimbursement. In this insurance covers only part of the property of the enterprise. Such insurance is more profitable for a company than attracting an insurance company for this purpose. In addition, self-insurance proves to be more profitable and with low probabilities of losses, for example, when a firm has many identical units of property. Thus, transnational oil companies have several hundred tankers. The probability of losing one tanker per year is very small. Therefore, the company prefers not to insure them in insurance companies, but to compensate losses from its funds. This is substantially cheaper than paying for the insurance of all tankers.
One of the mechanisms of self-insurance is the creation of captive insurance companies, ie. insurance companies that are members of a group of non-insurance organizations - industrial, industrial-financial, financial groups, etc. - and insure the risks of the whole group.
The captive insurance company allows you to invest the funds of insurance funds within the united business unit, keep profits within it, get some tax benefits (the laws of several countries provide for them), avoid bureaucratic delays in the preparation of insurance. Nevertheless, this method has a significant drawback: This type of activity adds to the group a new risk - the risk of deteriorating financial results associated with the onset of large, catastrophic risks, which is explained by the actual redistribution of losses between the captive insurance company and structural elements group. For this reason, when creating a captive insurance company, the risk manager must carefully evaluate all the advantages and disadvantages of using this self-insurance mechanism.
Self-insurance as a method of risk management allows to strengthen the incentive system for carrying out preventive measures; improve the procedure for damages; increase the profitability of the company by investing the collected insurance reserves within the group.
Nevertheless, when considering the application of self-insurance should take into account other factors. First, insurance companies often offer their clients valuable services to develop preventive measures and insurance payment procedures, and in self-insurance, preventive measures need to be developed and implemented independently. Secondly, to manage the self-insurance program the company must hire a staff of competent specialists, and if you contact insurance companies, then such an expense item can be avoided.
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