Risk Management Definition – Risk Management is the process for mitigating the impacts of specific risk threats and includes identification, assessment, and prioritization of risks. The ISO group has published standards governing every aspect of managing risk, which it defines as the effect of uncertainty on objectives, whether positive or negative. Risks can arise due to uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters, as well as war and any armed insurrection. The strategies to manage risk include shifting the risk to another party, avoiding the risk all together, reducing the negative impact of the risk, and accepting all or a portion of the consequences of a particular risk if the costs for containing the risk are not justifiable. The steps in the process benefit from the use of bow-tie” diagrams that list faults or threats on the left and the consequences on the right, with the hazard being defined in the middle that connects the two lists, resulting in the look of a bow tie. The steps include the following elements: 1) identify and characterize threats, 2) assess the vulnerability posed by these threats to valuable assets, 3) determine the probability of specific consequences that could occur, 4) identify ways to mitigate and control each risk, 5) prioritize each risk reduction strategy, and 6) implement a risk management strategy that makes the most sense based on priorities and assessments of costs for implementation and for potential damages. In forex markets, traders often assess their downside risks and implement appropriate hedging strategies unless the cost of hedging exceeds the probability of risk of loss.
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