October 05, 2009
"Law of Conservation of Financial Risk"...
Does a "Law of Conservation of Financial Risk" on the lines of "Law of Conservation of Energy" exist?
What does it or what could such a "Law of Conservation of Financial Risk" mean?
A Law of Conservation of Financial Risk could mean that Financial Risk can be neither creater nor destroyed, though it may be transformed from one form to another
First, lets consider the creation of Financial Risk. Can price change be created? Yes. How? By influencing the perception of demand and perception of supply...(NOTE: a change in perception is sufficient, this change in perception may not be based on a real change)
Second,can Financial Risk be destroyed? No, at least not effectively. Price controls are typically not completely effective over the long-term.
Third, it seems credit risk can at least at times be transformed into market risk (that's what collaterals do...) and market risk too can be transformed into credit risk (by purchase of options for hedging an underlying exposure OR by entering into forward contracts for hedging an underlying exposure)...(NOTE: transformation is not an essential requirement for a law of conservation)
This suggests that a Law of Conservation of Financial Risk does not exist simply because of the ability to create risk...
WHAT DO YOU THINK?
Posted by amgodbole at 01:07 PM
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