Types of Risks facing Businesses and Individuals
(A)
Businesses Risk
1-Price Risk
2-Credit
risk
3-Pure risk
1-Price
risk refers to the uncertainty of the magnitude of cash flows due to possible
changes in output and input prices. Price
risks are consisting of output risk and input risk:
Þ
Output risk refers to the
changes in the price of the commodities that a firm can demand for its goods
and services. These are:
o
Commodity price
risk is fluctuations in the prices of coal, copper, oil and gas etc.
o
Exchange rate risk refers to output
prices that affect due to risk of changes in the exchange rates of currencies.
o
Interest rate risk refers to interest
rate changes that can cost firm higher on borrowing loan or getting interest
from saving.
Þ
Input price risk refers to the risk
of changes in the price that a firm must pay labor, material and other input to
production process.
2-Credit
risk is a risk that a firm may face late payment
of his promised account receivable and it affect the organizations operational
activities. However, these are common in medium to large organizations.
3-Pure
risk is a risk that face by the medium to large organizations like
o
Damage of assets
o
Legal liability
o
Workers injury
o
Employees benefit
(B) Personal Risk
These are such type of risk face by
individual or families and it can be classified as:
Þ
Earning risk it is due to
aging, disability, unemployment or death.
Þ
Medical expenses are risk that
affects the personal incomes of individuals.
Þ
Liability risk is due to
non-payment of lease payment of car, home etc.
Þ
Physical asses risk may destroy or
steel like auto, home jewelry and electronics.
Þ
Financial assets
risk like loss in value of shares and bonds.
Longevity refers to possibility that reties people will outlive
their financial resources.
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