Risk Reduction

Question 1

What is the idea of risk reduction?

Answer 1

Risk reduction is the active strategy of reducing the probability that a risk materializes or the the expected loss that would result from a materializing risk.

Question 2

What are examples of risk reduction?

Answer 2

Diversification, Natural Hedging, Protection (Protective clothing)

Question 3

Briefly describe a general definition of portfolio diversification on a company level

Answer 3

Diversification can be used to be more independent of a several business and investing in completely other different activities

Question 4

Briefly describe natural hedge

Answer 4

To be less independent on exchange rate, the idea is relocating production into the currency area in order to reduce the interdependency on the exchange rate.

Question 5

What are problems of natural hedge?

Answer 5

There still will be a exchange rate problem, if the balance sheet is in another currency. e.g revenues in Dollar but balance sheet will be in €

Question 6

Describe the idea of conglomerate discount, what problem do you see ?