Transferable risk and Variance: Difference between pages

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Risks can usefully be classified as 'transferable' or 'non-transferable'.
1. ''Maths and financial maths.''


Transferable risks are those which can be transferred to someone else, at a price.
A statistical measure of the spread of given data around their mean.  


The greater the variance, the greater the spread.  The variance is calculated from the mean as the average of the squared differences of each data point from the mean.


Ways of transferring these risks include hedging with risk management products, or passing the risk to an insurer.  
Sampling may be used to estimate the variance of an underlying parent population from the variance of a sample selected from the parent population.


In these ways and others, we can remove transferable risks from our organisation, if we choose to.
The estimated variance of the parent population is greater than the variance of the sample by a factor of n/[n-1]
(where n = the number of items in the sample).


However, risks can only be transferred where there is a market for them and not all risks are transferable.
This type of variance is often denoted ''Var'' or ''SD<sup>2</sup>'' (being the square of [[standard deviation]], ''SD'').


:<span style="color:#4B0082">'''''Example: Transferable risk'''''</span>


:An exporter sells to a customer in another country, in foreign currency.
2. ''Variability.''


:The exporter has a transferable foreign exchange risk on the domestic currency equivalent of the future sales receipt.  
More generally, the degree of variability in an item, especially the degree of variabilty over time.


:The exporter can eliminate this risk by entering into a forward foreign exchange contract with a bank, effectively fixing the domestic currency equivalent of the receipt. What was initially the exporter's foreign exchange risk has now become the bank's risk.
Variance in this wider sense may be quantified in a number of different ways (which can include the stricter statistical measure of variance, as defined in 1. above).




:Naturally the bank will price the foreign exchange transaction so that it earns an appropriate reward for accepting and managing the risk transferred to it.  
3. ''Management accounting and generally.''
 
More generally still, any difference, especially a difference between two related financial variables.
 
For example in management accounting, the difference between the actual cost of an item and the budgeted cost.




== See also ==
== See also ==
* [[Committed risk]]
* [[Adverse]]
* [[Non-transferable risk]]
* [[B/(W)]]
* [[Risk management]]
* [[Covariance]]
* [[Uncommitted risk]]
* [[Delta-normal method]]
* [[Elasticity]]
* [[Flexible budgeting]]
* [[Mean]]
* [[Mean-variance efficiency]]
* [[Minimum variance portfolio]]
* [[Standard deviation]]
* [[Value at risk]]
* [[Variance analysis]]


[[Category:Financial_risk_management]]
[[Category:Accounting,_tax_and_regulation]]
[[Category:The_business_context]]
[[Category:Identify_and_assess_risks]]
[[Category:Manage_risks]]
[[Category:Risk_reporting]]
[[Category:Financial_products_and_markets]]

Latest revision as of 12:44, 21 December 2020

1. Maths and financial maths.

A statistical measure of the spread of given data around their mean.

The greater the variance, the greater the spread. The variance is calculated from the mean as the average of the squared differences of each data point from the mean.

Sampling may be used to estimate the variance of an underlying parent population from the variance of a sample selected from the parent population.

The estimated variance of the parent population is greater than the variance of the sample by a factor of n/[n-1] (where n = the number of items in the sample).

This type of variance is often denoted Var or SD2 (being the square of standard deviation, SD).


2. Variability.

More generally, the degree of variability in an item, especially the degree of variabilty over time.

Variance in this wider sense may be quantified in a number of different ways (which can include the stricter statistical measure of variance, as defined in 1. above).


3. Management accounting and generally.

More generally still, any difference, especially a difference between two related financial variables.

For example in management accounting, the difference between the actual cost of an item and the budgeted cost.


See also