There seems to be a thin line between risk transfer and risk sharing. Can someone explain with example how can this be differentiated?
$\begingroup$
$\endgroup$
Add a comment
|
1 Answer
$\begingroup$
$\endgroup$
Risk Transfer simply involves transferring "only" risk to another person for a price. For example, the downside risk of stock can be transferred by purchasing a call option. In this way, the buyer of call option transfers its risk to the writer of the call option. Another example is insurance, wherein, the buyer of insurance transfers its risk to an insurance company.
Risk Sharing is an entirely different concept. It involves sharing (dividing) common risk among two or more persons. I think the "partnership" form of business organization is the most common (and oldest) practice of risk sharing. Banks also use this practice to lend a big amount to individual large size corporation, each bank supplying a portion of the loaned funds. In these cases "both" the profits, as well as potential losses, are shared between the parties.
