Risks can usefully be classified as 'transferable' or 'non-transferable'.
Transferable risks are those which can be transferred to another organisation or person, at a price.
Ways of transferring these risks include hedging with risk management products, or buying insurance.
In these ways and others, we can remove many transferable risks from our organisation, if we choose to.
However, risks can only be transferred where there is a market for them, and not all risks are transferable.
- Example: Transferable risk
- An exporter sells to a customer in another country, in foreign currency.
- The exporter has a transferable foreign exchange risk on the domestic currency equivalent of the future sales receipt.
- 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.
- 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.