Event RiskExplained & Defined with Examples and Importance

Written By:
Lisa Borga

What is Event Risk?

Event risk refers to the possibility that an unexpected event will occur that has a negative effect on a sector, company, or stock.

Event risks can cause significant loss to a company’s financial position as well as investors and other stakeholders.

These risks include any type of event or situation which results in a negative impact on the functioning of an organization and can arise from many types of causes, including natural disasters, changes in market trends, hostile takeovers, and many more.

Due to the broad and typically unforeseen nature of these threats, they can be difficult to prevent.

However, for certain types of losses, the effects can be mitigated through insuring against losses.

Event Risks Explained

All companies face the potential that unexpected incidents may occur, which will have an impact on their operations or financial standing.

These incidents may cause a company to be unable to continue operations or meet its financial obligations, and the risk of these unexpected occurrences is known as event risk.

Event risk may occur due to something the company does, such as restructuring or acquiring another company.

However, it could also be the result of external corporate action.

This could be a leveraged buyout or a takeover.

It may even be an event that has nothing to do with company actions, such as a computer virus or a natural disaster.

The Importance of Event Risk

The value of a company depends on a lot of different things, some of which can be anticipated or controlled by the company’s management.

But there are also a number of unanticipated or unexpected risks from events that management may not be able to control.

These events can have a large effect on the bonds and stock of a company.

An investor cannot expect to account for all of the risks a company may encounter.

However, it is important to consider some of these risks and what influence they might have on the company’s financial performance and the bonds or stock of the company before deciding to invest in the company.

The Different Kinds of Event Risk

There are four basic types of event risk, and we will explain each of these types.

Opportunity Risk

Opportunity risk is the risk a company has of losing one opportunity while choosing to pursue another opportunity.

If a company has a choice between two opportunities, there is a possibility that the opportunity it chooses is not the best option.

This is opportunity risk.

Risk of Uncertainty

This is the risk that uncertain events may have an effect on the smooth functioning of a company’s operations.

These risks cannot be controlled because of their uncertain nature.

However, the risk can be reduced by insurance. Some examples of uncertain events are terrorist attacks, legal actions, political unrest, and market downturns.

Risk of Hazards

This type of risk is the risk that can come about due to the improper handling of materials that are harmful or as a result of poor workplace management, which could eventually cause a dangerous event that could seriously injure some of the company’s employees.

These dangerous events could involve chemical or biological hazards as well as improperly assigning responsibilities.

Operational Risk

Operational risk is the risk associated with a company’s everyday activities.

Operational risks usually occur as a result of failed systems, procedures, or policies.

It is considered a particularly dangerous risk because it can come about as a result of a company’s daily operations or activities that are necessary for the business to function.

Mitigating Event Risk

Event risk can never be completely prevented. However, many types of event risks such as fires and industrial accidents can be insured against to reduce their negative impact.

However, other types of event risk, such as major terrorist attacks like those occurring on September 11^th, 2001, though these events may be quite devastating, the effects can still be protected against in part through the use of certain financial products such as act of God bonds and collateralized debt obligations.

Investors can protect themselves at least in part against the risk of credit events through the application of credit derivatives.

Tools such as options contracts and credit default swaps can be used to limit the effects of a default.

Additionally, an investor could use a stop-limit order to reduce loss from a gap occurring outside of trading hours.

Key Takeaways

• Event risk is the potential for an unexpected incident that results in losses for the company, investors, or other stakeholders.
• Event risks can cause both direct economic harm and a loss of reputation to an organization.
• Event risks are a broad concept that is often divided into four classifications, including opportunity risk, operational risk, risk of hazards, and risk of uncertainty.
• For many types of event risks, the harm can be mitigated through insurance policies that cover those types of hazards.