PDF Ebook Financial risk analysis in aquaculture
Financial risk analysis methods were compared with the standard components of a risk analysis (hazard identification, risk assessment, risk management and risk communication). Financial and related performance measures are critical in assessing financial risk. A variety of quantitative methods of financial risk assessment (release assessment, exposure assessment, consequence assessment and risk characterization) are presented. In financial risk assessment, financial analysis methods (capital budgeting, enterprise budgets, cash flow analysis, financial performance ratios, partial budget analysis etc.) are necessary. Numerous examples from aquaculture research illustrate methods for probabilistic risk estimation (probability trees, Bayesian networks and stochastic simulation) and non-probabilistic risk estimation (what-if/scenario-based analysis, sensitivity analysis and break-even analysis). Evaluation methods based on decision analysis principles are well-established in financial risk analysis.
The paper illustrates the use of decision trees and Bayesian decision networks, risk programming (e.g. E-V efficiency and MOTAD), stochastic efficiency and multiple criteria/trade-off analysis (e.g. MCDM and AHP/ ANP) for assessing financial risk in aquaculture. Since decision analysis methods are mature, a number of software packages that implement many of the methods are also represented. Financial risk analysis methods should be integrated in the early phases of hazard identification and risk assessment in order to truly manage financial risk in aquaculture. While many studies and techniques are available to analyze financial risk in aquaculture, the methods are not necessarily linked to the traditional components of a risk assessment. This paper links financial analysis with traditional risk analysis methods and demonstrates the utility of decision analysis principles in analysing risk in aquaculture.
In aquaculture, financial risk refers to the potential loss associated with an aquaculture investment. Aquaculture investments may be public or private and made on behalf of stakeholders, including individual farmers, shareholders, farm enterprises, financial institutions and/or government institutions.
Risk is defined as uncertain consequences, usually unfavourable outcomes, due to imperfect knowledge (Kaplan and Garrick, 1981; Hardaker et al., 2004). Risk can be lowered by reducing or removing hazards, i.e. sources of risk. Hazards are tangible threats that can contribute to risk but do not necessarily produce risk. Agriculture and aquaculture are inherently risky financial endeavours (Goodwin and Mishra, 2000). In aquaculture, the hazards can be broadly classified as production threats or market (or economic) threats.1 According to the United States Department of Agriculture (USDA) (Harwood et al., 1999), United States producers of major field crops are concerned most with production yield and market price variability. Financial risk represents the likelihood of a hazardous event occurring and the potential financial loss that could result. Figure 1 illustrates how financial risk links hazards to financial loss. The presence of hazards affecting production and market conditions (e.g. price, demand) can bring about financial loss.
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