Risk And Business Are Hand - In - Hand

Business.

Lessons for businesses in local markets - risk and business are hand - in - hand. When someone invests their money into a business, bonds or lands, in stocks they are dealing with risks that can either increase their value or decrease their value in the future. One cannot hope to earn income unless he or she is willing to accept a certain amount of risk.

Risk strategy is the concept used to describe how businesses, people or organizations manage the risk around them. - the first step in managing risk is to know what your risks actually are. However, the investor must understand that risks are more global then they have ever been in the future. For example, let us assume a person wants to purchase land a few miles from his or her home and start a farm. How can you get more domestic then a small farm? Even though there is risk involved in this purchase it would appear from first sight that all of the risk is local.

However, what the investor may not realize is that the success of the farm depends in part on the international markets. - s. currently exports 43% of its current farm products to asia and china' s grain is beginning to compete with that grown in the u. The U. S. (Shalet& Albert, 1997) . The farmer may be able to grow his or her grain for$ 00 per bushel but if Asian grain moves into the market for 99 cents then this farmer would loose money and likely close his or her farm. Even if this farm plans on selling grain to other farms in the area that have livestock it is still subject to international forces.

Therefore, even a local operation is subject to global risks and events. - this concept is called diversification. A domestic approach the farmer may consider is to diversify his or her products with the assumption that if the price of grain goes down on the market it is unlikely that the farmer' s chicken will also decline at the same time. The more diversified the farm the more likely the organization can avoid major catastrophes associated with one product or another. Diversification doesn' t solve all risks associated with domestic farming. If one product becomes unprofitable it is doubtful that the three other products would do the same at the same time thereby reducing risk.

For example, the other risks a farmer might consider are the price of fuel( Barron, 2008) which is related to an increase in global trade( Dingwallsmith, 2007) . - since domestic farmers use a lot of fuel for their tractors and equipment the cost of fuel may hamper or damage their profits. When international trade increases the use of fossil fuels also increases which raises the prices. Domestic farmers are therefore subject to other issues such as a rising dollar, fuel prices, credit availability, equipment costs and much more that are tied to the global economy. If the farmer used a certain amount of his or her profits to invest in the oil companies then as prices increase the farmer can also reduce his or her loses with the profits in oil. In these cases diversification isn' t going to be of much help to the farmer but the farmer could use hedging to reduce these costs.

A domestic risk strategy doesn' t work well in an environment where nearly all of the other business inputs are subject to international pressures. - by jumping into the global risk management mindset farmers can set up their businesses to handle fluctuating international markers and global risks before they have a significant impact on the domestic market and the farmers operation. Thus it makes more sense for the domestic farmer to take a global risk strategy approach that will help him or her reduce the risk of loss and declining profit margins. Lessons: ) Local economies are tied to global economies. ) Diversification of products can reduce risk. ) Hedging the major inputs into a business can help reduce risk. Downswing stokes cautious stance. Dingwallsmith, R. (2007) .

Fund Strategy, 11 Shelet, L& Albert, C. (1997) . - s. farmer? Asia' s meltdown: most unassuming victim - the U. Black Book.