Event Risk: Meaning, Examples, How to Minimize (2024)

What Is an Event Risk

Broadly, event risk is the possibility that an unforeseen event will negatively affect a company, industry, or security causing a loss to investors or other stakeholders. While these events are typically unforeseen, the probability of certain events like corporate actions, credit events, or other hazards can still be hedged or insured against.

Key Takeaways

  • Event risk refers to any unforeseen or unexpected occurrence that can cause losses for investors or other stakeholders in a company or investment.
  • Credit events such as default or bankruptcy can be hedged against using credit default swaps or other credit derivatives.
  • External events such as natural disaster or theft can be minimized through insurance policies that cover such hazards.

Understanding Event Risk

Event risk can refer to several different types of occurrences, but generally can be classified as one of the following:

  1. Unforeseen corporate reorganizations or bond buybacks may have positive or negative impacts on the market price of a stock. The possibility of a corporate takeover or restructuring, such as a merger, acquisition, or leveraged buyout all come into play. These events can require a firm to take on new or additional debt, possibly at higher interest rates, which it may have trouble repaying. Companies also face event risk from the possibility that the CEO could die suddenly, an essential product could be recalled, the company could come under investigation for suspected wrongdoing, the price of a key input could suddenly increase substantially or countless other sources. Firms also face regulatory risk, in that a new law could require a company to make substantial and costly changes in its business model. For example, if the president signed a law making the sale of cigarettes illegal, a company whose business was the sale of cigarettes would suddenly find itself out of business.
  2. Event risk can also be associated with a changing portfolio value due to large swings in market prices. It is also referred to as "gap risk" or "jump risk." These are extreme portfolio risks due to substantial changes in overall market prices that occur due to news events or headlines that occur when normal market hours are closed. This sort of activity was seen frequently, for example, during the global financial crisis of 2008-09.
  3. Event risk can also be defined as the possibility that a bond issuer will miss a coupon payment to bondholders because of a dramatic and unexpected event. Credit rating agencies may downgrade the issuer’s credit rating as a result, and the company will have to pay investors more for the higher risk of holding its debt. These events pose credit risk.

Minimizing Event Risk

Companies can easily insure against some types of event risk, such as fire, but other events, such as terrorist attacks, may be impossible to ensure against because insurers don’t offer policies that cover such unforeseeable and potentially devastating events. In some cases, companies can protect themselves against risks through financial products such as an act of God bonds, swaps, options, and collateralized debt obligations (CDOs).

Investors at risk of credit events can use credit derivatives such as credit default swaps (CDS) or options contracts to hedge against default of a company. In addition, investors can utilize stop and stop-limit orders to minimize potential losses created by a security gapping between trading hours.

Event Risk: Meaning, Examples, How to Minimize (2024)


Event Risk: Meaning, Examples, How to Minimize? ›

Event risk refers to any unforeseen or unexpected occurrence that can cause losses for investors or other stakeholders in a company or investment. Credit events such as default or bankruptcy can be hedged against using credit default swaps or other credit derivatives.

How to manage risk in an event? ›

  1. Risk Management. ...
  2. Step 1: Identify those elements or activities which could carry a risk. ...
  3. Step 2: Identify the risks associated with each element or activity. ...
  4. Step 3: Determine the possibility of occurrence of the risk and the severity of the consequences if the risk does happen. ...
  5. Step 4: Risk Prioritization.

What methods do you use to minimize risk? ›

The basic methods for risk management—avoidance, retention, sharing, transferring, and loss prevention and reduction—can apply to all facets of an individual's life and can pay off in the long run.

What are the methods of risk minimization? ›

There are five basic techniques of risk management:
  • Avoidance.
  • Retention.
  • Spreading.
  • Loss Prevention and Reduction.
  • Transfer (through Insurance and Contracts)

What are the five 5 steps to managing risk? ›

Five Steps of the Risk Management Process
  • Risk Management Process. ...
  • Here Are The Five Essential Steps of A Risk Management Process. ...
  • Step 1: Identify the Risk. ...
  • Step 2: Analyze the Risk. ...
  • Step 3: Evaluate the Risk or Risk Assessment. ...
  • Step 4: Treat the Risk. ...
  • Step 5: Monitor and Review the Risk.
Jan 10, 2024

What are the four 4 ways to manage risk? ›

There are four main risk management strategies, or risk treatment options:
  • Risk acceptance.
  • Risk transference.
  • Risk avoidance.
  • Risk reduction.
Apr 23, 2021

What does it mean to minimize a risk? ›

If you minimize a risk, problem, or unpleasant situation, you reduce it to the lowest possible level, or prevent it increasing beyond that level.

What is the most effective type of control to Minimise risk? ›

Eliminating the hazard and risk is the highest level of protection and reliability in the hierarchy, followed by reducing the risk through substitution, isolation and engineering controls, then reducing the risk through administrative controls and the use of protective personal equipment (PPE) as the lowest level of ...

What are 5 risk management tools? ›

Project managers can use the following tools to safeguard projects against any risks, issues or other challenges:
  • Brainstorm. The brainstorming process is the first stage of risk management. ...
  • Root cause analysis. ...
  • SWOT analysis. ...
  • Budget tracking. ...
  • Risk data quality assessment. ...
  • Risk register. ...
  • Time tracking. ...
  • Resource management.
Sep 19, 2023

What are the six steps to reduce risk? ›

  • Step 1: Hazard identification. This is the process of examining each work area and work task for the purpose of identifying all the hazards which are “inherent in the job”. ...
  • Step 2: Risk identification.
  • Step 3: Risk assessment.
  • Step 4: Risk control. ...
  • Step 5: Documenting the process. ...
  • Step 6: Monitoring and reviewing.

What are effective techniques would you use to minimize risk in the business? ›

Top Ways to Manage Business Risks
  • Prioritize. The first step in creating a risk management plan should always be to prioritize risks and threats. ...
  • Buy Insurance. ...
  • Limit Liability. ...
  • Implement a Quality Assurance Program. ...
  • Limit High-Risk Customers. ...
  • Control Growth. ...
  • Appoint a Risk Management Team.

What is the most common method of avoiding risk? ›

Common risk reduction mechanisms are security measures, policy enforcement, and employee education and awareness, as well as financial and legal positioning.

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