Once the risk points are identified and quantified, the next logical step is to fight against them – Control them!
Generally the below 4 ways are how an organization deals with risk points (controls the risk points):
- Accept them – Some risks may be inherent to the business. Some may invest in a particular asset class (or securities) primarily to take that risk – and return. This is the primary risk-return matrix.
- Transfer them – this is typically done through entering into derivative contracts (We will study this in detail under the chapter on Derivatives). The same can be achieved through taking an insurance.
- Reduce them – this can be done by implementing adequate control points and also by frequently testing the control points implemented – to ensure they work (Stress testing)
- Eliminate them – when the risk points are beyond managing or if we do not want such a risk on our balance sheet, we simply eliminate them. This can be done by either not going that path – simply removing that liabilities or assets (businesses) that generate these risks.
