Method Of Handling Speculative Risks

Method Of Handling Speculative Risks: Risk diversification is common in speculative risks. It involves diversifying into many activities with the aim of offsetting losses from an activity by a compensating gain from her other activities. 

In other words, the unit exposed to risks tries to engage in different activities of different profits centers as a safeguard to risk of loss from the operations of the unit/entity. This method of handling risk sums up the facts about the saying: “not putting your eggs in one basket”.

Method Of Handling Speculative Risks

Risk Diversification: Risk diversification is common in speculative risks. It involves diversifying into many activities with the aim of offsetting losses from an activity by a compensating gain from her other activities.

In other words, the unit exposed to risks tries to engage in different activities of different profits centers as a safeguard to risk of loss from the operations of the unit/entity. This method of handling risk sums up the facts about the saying: “not putting your eggs in one basket”.

Hedging or buying in anticipation of incremental change in price, hoarding, making forward transactions such as trading financial securities based on call or put options are forms of risk diversification. Options in financial terms refer to the rights or privileges to buy or sell a fixed number of specified prices within specified periods. Call option and put option are different forms of options. While the call option confers the holder a right to buy from the maker, the put option confers a right to sell to the maker.

Other good examples of risk diversification include the departmentalization of products such that each department represent different costs center and profits center; investing in different projects like buying shares of different companies; and buying commodities now against fluctuations in price in a future time.

Risk Combination:

Risk combination involves two specific processes: grouping of similar or homogeneous risks into exposure units and predicting the combined chance of loss. Thus, predictable loss is then shared proportionately by all the units in the  combination. The units risks are reduced, uncertainty is reduced, and associated losses shared among the units.

Insurance companies apply this techniques when they accept insurable risks from many persons or policyholders.

And many social insurance schemes such as the extended family system, social clubs, age-grade associations, the erstwhile National Provident Fund (NPF), and the Nigerian Social Insurance Trust Fund (NSITF) as well as other private sector Pension Scheme, take advantage of this method of handling risks.

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