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Method of diversification of financial risk

Risk diversification method is used primarily to neutralize the negative financial consequences of non-systematic (specific) types of risks. This method allows to minimize to a certain extent certain types of systematic risks - currency, interest rate and some others. The principle of the diversification mechanism is based on the division of risks that prevent their concentration.

The following areas can be used as the main forms of diversification of financial risks of the enterprise:

  • Diversification of financial activities involves the use of alternative opportunities to generate income from various financial transactions - short-term financial investments, formation of a loan portfolio, implementation of real investments, formation of a portfolio of long-term financial investments, etc.
  • Diversification of the foreign exchange portfolio ("currency basket") of the enterprise provides for the selection of several types of currencies for foreign economic transactions. This diversification reduces financial losses on the foreign exchange risk of the enterprise.
  • Diversification of the deposit portfolio involves placing large amounts of temporarily available cash in multiple banks. Since the conditions of placement of monetary assets do not change significantly, this diversification ensures reduction of deposit risk level of the portfolio without change of its yield level.
  • Diversification of the loan portfolio involves a variety of buyers of the enterprise 's products and aims to reduce its credit risk. Usually, diversification of the loan portfolio in the process of neutralizing this type of financial risk is carried out together with limiting the concentration of credit transactions by establishing a credit limit differentiated by groups of buyers.
  • Portfolio diversification reduces the non-systemic risk of a portfolio without reducing its yield.
  • Real investment programme diversification includes various investment projects with an alternative sectoral and regional focus in the investment programme, thus reducing the overall investment risk of the programme.

The mechanism of diversification of the Rsiks selectively affects the reduction of negative consequences of certain financial risks, providing an undeniable effect in neutralization of complex, portfolio financial risks of a non-systematic (specific) group, it does not have an effect in neutralization of the vast majority of systematic risks - inflation, tax and others. Therefore, the use of this method is limited in the enterprise.