Page 148 - RISK Management IC 86

Risk Management

Q.8.a) How do you measure Corporate attitudes towards
risk ?

Ans. Corporate risk attitudes are partially a reflection of
corporate objectives. Some companies do nothing to
prevent loss whereas some may spend money for loss
prevention, which could reduce the profit to some extent
but prevent suffering tremendous loss. Some firms may
maintain contingency funds whereas some may purchase
insurance.

These decisions too cost money and reduces the firm's
maximum possible profit. This leads to two conclusions.

A firm seeking to maximize short term money profits
regardless of risk, would not spend on either loss
prevention or insurance. On the other hand, if the objective
of the firm is to maximize expected profits, then any
expenditure on loss prevention is worth undertaking even
though the actual profit/loss results may vary substantially
from the expected profit.

However, if the firm is prepared to forego some profit in
order to achieve more stable earnings, then the firm would
consider spending for the insurance.

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