Types of Risk
Additional useful information on types of risk
Market or price risk relates to the uncertainty in markets and prices for both inputs (purchased for the production process), and outputs (products and services for sale by the firm).
Market/price risk has always been a major problem in most businesses and results from the economic forces of supply and demand. Outcome of these forces are fluctuations in the price for a commodity and/or inputs in the production of that commodity.
These fluctuations may be short-term and long-term. The degree of fluctuation and the length of time are critical to their effects on the business. Managers generally anticipate some degree of fluctuation in prices and plan accordingly. These plans may include spreading production and sales over time to average the effect of peaks and troughs in the market, establishing contracts to obtain a fixed price, and 'pooling ' sales with other producers to obtain a better market or an 'averaging of returns ' from the larger organisation.
Low prices in the short term may be tolerated by a business if it has sufficient cash reserves to meet negative financial returns from lower prices. Low commodity prices in the longer term pose serious threats to the viability of the enterprise, and the business, should that enterprise form a major source of income.
The growing impact of globalisation and opening of most world economics is also increasing the variability of market and price risk. Remember that this includes both opportunity and potential loss.
Production risk is the variability inherent in the firm 's production processes. This is predominantly the variability of product yield, both in yield quantity and quality. Often quantity is considered but quality is also an important consideration – particularly for products where warranty and service support are provided.
Variances in labour, weather, transport and inventory can all reduce (or increase) expected output, or cause delay in the
Market or price risk relates to the uncertainty in markets and prices for both inputs (purchased for the production process), and outputs (products and services for sale by the firm).
Market/price risk has always been a major problem in most businesses and results from the economic forces of supply and demand. Outcome of these forces are fluctuations in the price for a commodity and/or inputs in the production of that commodity.
These fluctuations may be short-term and long-term. The degree of fluctuation and the length of time are critical to their effects on the business. Managers generally anticipate some degree of fluctuation in prices and plan accordingly. These plans may include spreading production and sales over time to average the effect of peaks and troughs in the market, establishing contracts to obtain a fixed price, and 'pooling ' sales with other producers to obtain a better market or an 'averaging of returns ' from the larger organisation.
Low prices in the short term may be tolerated by a business if it has sufficient cash reserves to meet negative financial returns from lower prices. Low commodity prices in the longer term pose serious threats to the viability of the enterprise, and the business, should that enterprise form a major source of income.
The growing impact of globalisation and opening of most world economics is also increasing the variability of market and price risk. Remember that this includes both opportunity and potential loss.
Production risk is the variability inherent in the firm 's production processes. This is predominantly the variability of product yield, both in yield quantity and quality. Often quantity is considered but quality is also an important consideration – particularly for products where warranty and service support are provided.
Variances in labour, weather, transport and inventory can all reduce (or increase) expected output, or cause delay in the
References: Lee, W. F., Boehlju, M. D., Nelson, A. G., & Murray, W. G. (1980). Principle of increasing risk. In Agricultural finance (chap. 2, pp. 32-37). Ames: Iowa State University Press.