What is Risk Management?

Risk management is the process of assessing, managing and mitigating losses.  This applies to both business and investing.Risk management exists in many forms throughout the financial world.  An individual investor deciding to buy low risk government securities instead of high yield corporate bonds is an example of risk management.  On the more complex side, it can involve trading in various types of derivative and futures securities to hedge against wide swings in investment portfolios. Companies and investors frequently use financial derivatives like options and futures, and strategies like portfolio and investment diversification, in order to mitigate or effectively manage risk. Outside the financial world, risk management involves organizing and operating to reduce the potential for accidents, losses and catastrophes.  This can involve anything from managing risk of traveling abroad to designing safe building and products, as well as the most traditional form of risk management – purchasing insurance.  Risk management also involves having a plan in place to get things back to normal as quickly as possible if something bad does happen.  Marcy holds a high number of stock for Gobble Corp (GC) and wants to protect her investment from taking a loss. One option is for Marcy to enter into a futures contract that locks in the value of her Gobble Corp stock. This way, Marcy is able to manage the downside risk of Gobble Corp stock value by making sure she won’t lose any value should the stock price fall. However, she will also be giving up any gain if the stock price goes up.