What is an Unsystematic Business Risk? Definition, Factories, How to Hedges It?

Introduction:

Business Risk can be defined as the risks that can adversely impact the business by lowering profitability or impacting its market share.

Therefore, this is something that needs to be taken seriously by the business, to ensure that they survive in the already competitive business landscape.

In this regard, it is quite rudimentary for businesses to identify the relevant business risks to create a viable strategy against these risks and direct their strategy accordingly.

There are numerous types of risks that businesses are exposed to, and they can broadly be categorized into systematic and unsystematic risks.

Systematic Risks can be defined as risks that are not contingent on the business model the business follows.

On the other hand, it can be seen that unsystematic risk can be defined as the risk that occurs because of the business itself.

Definition:

Unsystematic Business Risk can be defined as the risk that is inherent to a specific company or industry. This is also referred to as diversifiable risk or specific risk.

This is predominantly called so because it is specifically related to the company, its operations, or other inherent factors that make them susceptible to the underlying business risk.

As the name suggests, this risk can be predicted well in advance, so companies can craft strategies to hedge against this risk.

In this regard, it can further be seen that this risk can be diversified using numerous strategies that can reduce business exposure.

Factors of Unsystematic Risk

It can be seen that there are two main factors because which unsystematic risk occurs.

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Firstly, the major cause of unsystematic risk is inherent business risk. Business Risks refer to the risks underlying the current business model or practices.

These factors can either be internal or external. Speaking of internal reasons for business risks, it can be seen that they are mainly attributed to the inability of the company to induce operational efficiency within its business model.

This means that the business model has certain features which hamper its ability to meet targets or reach respective heights.

On the contrary, external business risks refer to the risks that businesses are exposed to, because of industry-related factors. For example, a new entrant in the market threatens the company’s financial standing.

The second major factor of unsystematic risk is financial risk. Financial Risk mainly lies in the existing capital structure of the company. Financial risk is mainly reflected as a mismatch between a company’s debt and equity.

Alternatively, financial risk exposure also occurs when the company is exposed to high-risk debts, which have a significant probability of defaulting on their loans.

How Can Companies Hedge Against Unsystematic Risk?

Even though companies cannot completely hedge against business risks, it can be seen that companies can adopt several policies that can ensure that they can create a cushion that can reduce their exposure.

When it comes to unsystematic risk, this can mainly be achieved through diversification policies and ensuring that companies can diversify their portfolio.

This can greatly help them to create an effective strategy to eliminate a significant risk, i.e. market risk.

Similarly, businesses can also try to make changes in their business model to make it more robust, as per the new changes in business strategies.

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Alternatively, this can help businesses prepare against unprecedented circumstances, by being more adaptive and receptive to the changes that take place within or outside the business.

Conclusion

Unsystematic Risk is the risk that a business faces because of its business model or operations. Given the intrinsic nature of this particular risk, it can be regarded that this is something that the business can control by analyzing the inherent risks so that it can formulate a strategy at the earliest.

This is an important consideration for the business since it can greatly impact the profitability and sustainability of the business model.

However, not all unsystematic risks can be accurately predicted. In this regard, businesses must stay prepared for all risks to strengthen their position in the industry.

It is perhaps a useful strategy to conduct a risk analysis after every short interval to assess the position and strategize again, depending on the situation.