Introduction to Price Risk Management - Week Two Flashcards

A collection of vocabulary flashcards covering the fundamental concepts of risk, uncertainty, agribusiness classification, and the risk management process as presented in the lecture.

Risk

A condition where the probability of occurrence is known, outcomes can be predicted, and the situation can be measured, quantified, and managed.

Uncertainty

A condition where the probability of an event occurring is unknown, outcomes cannot be predicted, and the situation is uncontrollable.

Agriculture Volatility Index

A measure of sector volatility where agriculture scored $234$ compared to a score of $46$ for healthcare, making it the most volatile sector in Australia from $1961$ to $2009$.

Risk (Rumsfeld Definition)

Characterized as "known unknowns."

Uncertainty (Rumsfeld Definition)

Characterized as "unknown unknowns."

Business Risk

Any risk a business faces regardless of how it is financed, including factors like commodity prices, production levels, costs, and climate.

Finance Risk

Risk significantly influenced by management that relates to the level of borrowed funds and debt in the business.

Commercial and Legal Risk

Risks associated with relationships like contracts, leasing arrangements, business structures, and bank mortgages.

Risk Takers (Personal)

People who view risk as an opportunity to make a profit and are prepared to accept losses in doing so.

Risk Neutral

A person who only takes risks when necessary to achieve objectives and does not exhibit the pessimism of a risk-averse person.

Risk Averse

People who wish to avoid risk and are willing to sacrifice potential profit to do so.

Risk Management

An attempt to manage situations with probabilistic outcomes by narrowing the range of possible outcomes facing the decision maker.

Risk Transfer

The strategy of moving risk to a bearer who is prepared to accept it.

Long Trader

A market participant, such as a farmer or trader, who holds or expects to hold stocks of a physical commodity.

Commodity

A product that is undifferentiated by the supplier, meaning there are no identifiable differences between suppliers (non-specificity).

Centralised Commodity Market

A physical place or computer facility where many buyers and sellers meet to buy and sell standardised and uniformed production lots.

Liquidity

The ease with which both buyers and sellers can enter a market and conduct transactions.

Degree of Risk (Scale)

A numeric scale where $0$ indicates an event is impossible and $1$ indicates absolute certainty.