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Risk is one of six major areas of functional responsibility in business David M. Boodman (1987). The risk management has evolved significantly over the past decades causing dramatic changes in the communication channels required to effectively handle the ever-changing risks a firm faces. The first generation of risk management dealt primarily with risks inside a company creating a need for internal risk communication. The second generation, which arose with the growth in third-party liability claims, involved many more stakeholders external to the company and forced the risk management function to deal with communications to these external parties. The third generation, which began as an expansion of the external risks that firms are exposed to, involved the board and senior management in the risk communication function (Nielson, Kleffner, Lee & Ryan, 2005). Moreover, the determinants of risk adoption shows that in case of a general absence of differences in the financial and ownership characteristics, the firms with greater financial leverage are more likely to adopt a dynamic risk management approach. Risk management is also the key for reducing the burden on the public exchequer as also for minimizing the misery and trauma of the masses exposed to disasters (Rautela, 2005).
Analysis of individual’s risk preference studies indicate that individual's decision to purchase cover and the magnitude of the risk parameter is dependent on economic conditions of the subject (Liebenberg & Hoyt, 2009). Empirical results indicate that consumers exhibited a relatively uniform degree of risk aversion at particular economic conditions (Attanasi & Karlinger, 1979). Apart from economic environment, risk corresponds to any pair of distribution functions and attitudes to risk are represented by any pair of non-decreasing and concave utility functions (Landsberger & Meilijson, 1999). A study by (Sharma, Vashishtha & Ashutosh, 2007) evaluates the effectiveness of derivatives as alternative risk management tools and basic framework required to implement them. According to the study the applications of traditional risk-hedging tools and techniques have proved to be costly, inadequate and more importantly they offer a hedge mostly against only the price risk. More over the success of hedging as a risk management tool depends on hedging effectiveness and optimization with consideration of basic risk and credit risk (Brockett, Wang & Yang, 2005).