A captive insurance company is a subsidiary company formed to insure the risks of its parent company or a group of companies. This structure allows the parent company to manage and tailor its own risk management strategy, potentially leading to cost savings and more comprehensive coverage.
A guarantee is a formal promise made by a third party, known as a guarantor, ensuring the fulfillment of contractual obligations if the primary party defaults. This mechanism is often used in financial transactions to mitigate risk.
A Letter of Credit (L/C) is an instrument or document issued by a bank guaranteeing the payment of a customer's drafts up to a stated amount for a specified period. It substitutes the bank's credit for the buyer's and eliminates the seller's risk. It is used extensively in international trade.
Portfolio insurance, also known as portfolio protection, involves using financial futures and options markets to safeguard a portfolio's value against market downturns.
Risk avoidance involves management methods utilized to bypass as much situational risk as possible. While the elimination of all risk is rarely feasible, in many situations it is prudent to develop strategies where specific risks can be circumvented.
Risk management is a process that aims to help organizations understand, evaluate, and take action on all their risks to maximize their value. This can include taking out insurance or hedging through derivatives.
Sale or return is a terms of trade in which the seller agrees to take back from the buyer any goods that have not been sold within a specified period. This strategy is commonly used in retail to reduce the risk to retailers of carrying unsold inventory.
