Quantitative methods for assessing financial risks

Table of contents:

Quantitative methods for assessing financial risks
Quantitative methods for assessing financial risks

The task of analysis in quantitative terms is to numerically measure the level of influence of changes in the risky conditions of the project, which are checked not only for risk, but also for the behavior of performance indicators. In our article, we will consider modern financial risks and methods for their assessment.

Basic techniques

quantitative methods for assessing financial risks

Among the main quantitative methods for assessing financial risks, it is customary to single out the following:

  • Statistical methods.
  • Analytical techniques.
  • A financial risk assessment method involving financial feasibility and sustainability analysis.
  • Methodology for estimating project costs.
  • Method of expert assessments.
  • A method for assessing financial risks using analogues.

Analytical methods

methods for assessing the financial risks of an enterprise

Zonal methods for assessing financial risks implies the following classification:

  • Discounting.
  • Analysis of cost recovery for the project.
  • Assessment of damage from a risky decision that is possible.
  • Production break-even analysis.
  • Sensitivity analysis.
  • Stability analysis.
  • Simulation (in other words, the Monte Carlo method).
  • Scenario analysis.
  • A technique called "decision tree", according to which zonal methods for assessing financial risks are ranked by the degree of increase in complexity in the calculations.

Statistical methods

So, we reviewed the classification of financial risk assessment methods briefly. It is advisable to proceed to a detailed study of each of the categories. To begin with, let's analyze the statistical methods for assessing the financial risks of an enterprise.

It is important to note that among the advantages of this class of methods, involving factorial, regression and variance analysis, it is necessary to highlight a certain degree of universality. The root of their shortcomings is the need to have a substantial database. In addition, it is worth emphasizing the ambiguity of the findings, some difficulties that arise in the process of analyzing time series, and so on.

In order to calculate the risks of economic activity, statistical methods for assessing the financial risks of an enterprise are used quite rarely. Nevertheless, in recent years, the technique of cluster analysis has gained relative popularity, through which it is sometimes possible to seize data suitable for use. Often cluster analysis is used in the processdevelopment of business plans. It is then that the calculation of the overall risk ratio is made on the database, which are obtained by classifying risks into groups.

It must be borne in mind that the statistical method of assessing the level of financial risks is to study the statistics of profits and expenses that were relevant in a particular or similar company. The main goal here is to determine the likelihood of an event, as well as to establish the magnitude of the risk.

Since risk is a probabilistic category, it is customary to use probabilistic calculations to quantify its level. In this case, the degree of risk should be understood as the probability of a situation associated with losses, as well as the amount of damage from it, which is possible.

In particular, the risk of a businessman in quantitative terms is characterized by nothing more than a subjective assessment of the expected, in other words, the probable value of the minimum and maximum loss (income) from capital investment. The greater is the range between the minimum and maximum loss (income) subject to equal probability in terms of receipt, the higher the level of risk. The greater the indicator of the uncertainty of the economic situation in the decision-making process, the higher the level of risk. It is worth adding that the uncertainty of the economic situation, as a rule, is due to opposition, chance or lack of full information.

Where have we come to?

zonal method for assessing financial risks

Having considered the characteristics of statistical methods for estimating financialeconomic risks, it is advisable to draw some conclusions. Thus, risk has a mathematically expressed probability associated with the onset of a loss. It is based on statistical data and can be calculated with a fairly high level of accuracy.

To identify the magnitude of the risk in quantitative terms, you should have knowledge of all the possible consequences of a single operation, as well as the likelihood of their occurrence. Probability must be understood as the possibility of obtaining a certain result. In relation to the tasks of the economic plan, the methods of the theory of probability, as a rule, come down to identifying values ​​related to the risk of the occurrence of certain events, as well as to choosing from situations that are possible, the most preferable based on the maximum indicator of mathematical expectation. In other words, the latter is equal to the absolute magnitude of a certain event, which is multiplied by the probability that it will occur.

Give an example

For a complete assimilation of the material regarding financial risk management and methods for assessing financial risks of a statistical plan, it is advisable to consider an example. There are two options for investing capital, and it has been established that in the case of investing in project A, profit equal to 250,000 rubles is endowed with a probability of 0.6, and when investing in project B - in the amount of 300,000 rubles with a probability of 0.4.

In this scenario, the expected receipt of funds from capital investment (in other words, the mathematical expectation) will be 150,000 rubles (250 x 0.6) for project A and 120,000rubles (300 x 0.4) in accordance with project B.

Expert method for assessing financial risks

financial risk management financial risk assessment methods

The most important place in the system of evaluation methods is occupied by expert evaluation, in other words, the implementation of expertise, subsequent processing and application of its results in the process of substantiating the value of probability. It is worth noting that the implementation of an expert assessment should be considered as a complex of mathematical, statistical and logical procedures, methods that are associated with the activities of an expert involved in the processing of information necessary for analysis and, accordingly, making certain decisions.

The level of risk can be measured according to two criteria. We are talking about the variability (fluctuation) of the possible result and the average expected value. Under the latter one should consider the value of the magnitude of the situation, which is associated with an uncertain event. The average expected value is considered to be a weighted average of all possible outcomes. In this case, the probability of each is applied as the frequency or weight of the corresponding value.

Let's consider an example

methods for assessing the level of financial risks

Let's look at an example of the presented quantitative method for assessing financial risks. It is known that in the case of investing capital in project A, out of 120 situations, a profit equal to 250,000 rubles was received exactly in 48 cases (the probability here is 0.4), a profit of 200,000 rubles - in 36 situations (probability 0.3), and the profit is 300000 rubles - in 36 situations (probability 0.3). So, the average expected value will be (250 x 0.4 + 200 x 0.3 + 300 x 0.3)=250,000 rubles. Similarly, you can find that when investing capital in project B, the average profit is (400 x 0.3 + 300 x 0.5 + + 150 x 0.2)=300,000 rubles.

As a result of comparing two amounts of expected profit, we can conclude that when investing in project A, the amount of profit varies from 200,000 to 300,000 rubles and the average is 250,000 rubles; when investing capital in project B, the profit ranges from 150,000 to 400,000 rubles, and the average value is 300,000 rubles.

Analytical Methods

Let's consider analytical methods and indicators of financial risk assessment. Practice shows that they are used extremely often. The advantage in this case is that they are quite well developed and very easy to understand. The analytical methodology includes an assessment of the sensitivity of the project to certain changes in parameters, as well as an assessment of the stability of a company or enterprise in financial terms.

Among the indicators of the analytical method for assessing financial risks, it is important to note the following:

  • Breaking point.
  • Sensitivity factor.
  • Financial sustainability ratios.

It is advisable to consider each of them separately. Thus, the sensitivity coefficient is used to assess non-diversified (systematic) risk in quantitative terms, which, as far as is known, is associated withfirst of all, with general market fluctuations in profitability and prices. Sensitivity analysis should be understood as the simplest way to quantitatively analyze the risks that are most often used in practice. Its key purpose is to determine the degree of impact of each of the factors, which vary, on the overall result of the project. As an information basis, data on the flow of money of an investment project are relevant here. As an integral indicator that characterizes the results of the project, as a rule, performance criteria in the project plan are considered. The standard sensitivity analysis used on a project examines the successive single impact on the bottom line (in other words, project performance) of a single variable (variable, factor) that is tested for risk, while keeping the other parameters unchanged.

It is important to know that the sensitivity factor calculation is as follows:

  • Definition of the main indicator in relation to which the sensitivity assessment is carried out (net income generated, internal rate of return, etc.).
  • Identification of factors (state of the economy, inflation rate, etc.).
  • Determining the value of the main indicator at various stages of the project (purchase of raw materials, production, sales, capital construction, transportation, etc.).

The sequences of receipts and expenditures of financial resources formed in this way imply the definitionflows of funds of money for absolutely every moment, in other words, the calculation of performance indicators. Next, tables or diagrams are built that reflect the dependence of the named resulting indicators on the parameters of the original type. By comparing the obtained diagrams with each other, it is possible to calculate the so-called main indicators that have the maximum impact on the assessment of the profitability of a project.

The next method for assessing financial risks is to use the "break-even point" (BBU). It is worth noting that it is considered the point of the critical volume of sales (production), at which the profit from the sale of manufactured marketable products is equal to the costs associated with its manufacture. In other words, the profit in it is zero.

It is worth noting that the use of this financial method for assessing risk analysis involves identifying the marginal production volume. Below, his project will become unprofitable. It is known that when identifying the break-even point, they usually proceed from the equality of income (receipts) from the sale of a marketable product and the costs of its production.

Initial data for calculation:

  • Price per commodity product.
  • The amount of costs that do not depend (or depend to a small extent) on the volume of the product produced (this category is called fixed costs).
  • Variable costs per unit of marketable output.

The higher the break-even point, the lower the degree of attractiveness of the project, because forRealization of its profitability (profitability) should ensure the maximum volume of production (sales). It should be noted that the analysis of the impact of the dynamics of each of the presented indicators on the TBU implies an assessment of the sensitivity (in other words, the degree of risk) of the project to actual or possible changes.

Cost feasibility and financial sustainability analysis

analysis of methods for quantitative assessment of financial risks

The most important method for assessing financial risks in financial risk management is the analysis of financial stability, as well as the feasibility of spending. You should know that in the economy, sustainability must be understood as the ability of an economic system, regardless of the circumstances, to maintain its own performance, that is, even after the influence of unfavorable environmental factors on it.

Through the methodology of sustainability analysis, the change in the key economic values ​​of the project is revealed in the event of adverse changes in terms of various factors. For example, an indicator of possible profit is being studied after a change in prices for materials and raw materials, which is necessary for the production of marketable products. This method is considered a good illustration of the impact of input factors on the final result of the project.

Its main disadvantage is that the change in a single factor is considered in an isolated manner, while in practice all factors of the economic plan are correlated to some extent. Therefore, the use of this method as an independenttool to carry out risk analysis is very limited.

In the process of analyzing methods for quantitative assessment of financial risks, it should be noted that the financial stability (state) of a commercial structure is considered a complex concept, characterized by a system of relative and absolute indicators that reflect the availability, use and placement of the company's financial resources and collectively determine sustainability position of the company in economic terms and its reliability as a business partner.

When assessing the degree of economic risk in the system of indicators that characterize the financial condition of the company, special interest can be shown to solvency indicators. It is advisable to consider this category as the readiness of an enterprise to repay debts in the event of claims from all creditors at the same time, but only for short-term obligations (the fact is that for long-term repayment periods are known in advance). The use of solvency indicators implies the ability to assess the company's readiness to pay off creditors at the present time on priority payments exclusively with its own funds.

It is worth noting that one of the most accessible risk assessment methods for a businessman in relative terms is the use of financial stability ratios. They are considered the most important tools that are widely used to quantify economic risks. The coefficients are determined in the process of analyzing the financial condition of the company. So,the key indicator of solvency is the liquidity ratio. Liquidity should be viewed as the ability of a commercial entity to use assets as a direct means of payment or instantly turn them into money to pay off debt obligations in a timely manner.

Final part

financial methods for evaluating risk analysis

So, we have considered the classification and main features of financial risk assessment methods. It should be noted that in order to make competent decisions, real quantitative characteristics of risk and reliability are needed, and not their imitation. So, they must have clear content. Such features can only be probabilities. It is worth emphasizing that both subjective and objective probability can be used to make decisions. The latter can be calculated on the basis of indicators of statistical and financial statements.

Some methods are specific in nature. For example, in the process of applying the analogy method, some care must be taken. Even in the most well-known failures of projects, it is difficult to set the stage for future analysis accordingly and prepare a realistic set of scenarios for possible failures.

In addition to quantitative methods, qualitative methods for assessing financial risks are widely used today. The main task of the qualitative approach is to identify and subsequently identify possible varieties of risks of a particular project, as well as todefinition and characterization of factors and sources that affect this type of risk. In addition, a qualitative analysis implies a description of the possible damage, its valuation and measures related to risk reduction or prevention (we are talking about risk insurance, the formation of reserves, and so on). The qualitative approach, which does not allow to determine the quantitative value of the risk of the project, is considered the basis for the implementation of further research through quantitative methods using the mathematical apparatus of mathematical statistics and probability theory. The key task of the quantitative approach is to numerically measure the impact of risk factors on performance parameters. Qualitative valuation techniques include cost-benefit analysis, analogy technique, and peer review technique.

Popular topic