Every investment or business is associated with risk. Associated risks impact the value of any security at the time of selling the security or the inflow of money from the security when it is held or an additional income generated by reinvesting the interest generated from the holding of securities.

Broadly the risks are classified as systematic risk and unsystematic risk

Systematic risk- It is the probability of loss associated with the entire market segment

Unsystematic risk- It is the probability of loss associated with the specific industry or specific segment.

However, some of the risks associated with the investments or businesses can be monitored and controlled by specialists. But certain risks occur due to unexpected events. Such unexpected events and the risk associated with such events are known as event risks.

Event risk in a bond is the risk that diminishes the value of the bond. Bond investors are not able to receive their interest payments or principal amounts on happening of such uncertain events in a business that impacts the financial condition of the market.

Few examples of uncertain events happening that impact the financial condition of any business are:

natural disasters such as earthquakes, floods, or fire in the factory, a Covid-19 virus that impacted the market globally, and so on.

An external corporate action such as a hostile takeover or leveraged buyout can lead to event risk.

Event risk can come from the actions of the company itself, such as undertaking a restructuring.

Event risks get broadly classified into the below mentioned four types:

Opportunity risks- This risk refers to the chances of missing out on an opportunity while choosing a different available option. For example: If a company wants to choose one out of two options and there is a likelihood that the missed out choice was the best option that eventually was not pursued.

Uncertain risks- As mentioned earlier an uncertain risk is the risk occurring due to events that were not predicted before. Such events hamper the overall operations of the company and eventually impact the investors as well. Such uncertain events consist of fire breakout in the company or COVID-19 and so on.

Hazardous risks- Such risks occur due to poor working conditions or improper management of the materials required for the operations of the company. Such negligence leads to any hazardous events that affect the company manpower and ultimately impact the production and cash flow of the company. Some of the hazardous events include chemical hazards or inappropriate allocation of the tasks to the workers.

Operational risks- Operational risk is associated with the daily operations of the business. Such risks occur on events such as failure of systems, manpower strike, or failure of processes. Such risks directly impact the workflow of the business.

Rigorously following the risk management strategies can lead to minimizing the impact happening out of such uncertain events. Businesses can insure themselves against uncertain events such as fire breakout which can lead to coverup the losses that occurred under such events.

Financial products such as Act of God bonds i.e. an insurance-linked security wherein insurance companies establish a certain amount in reserve against unforeseen events.

Investors can opt for credit default swaps to safeguard themselves against credit default.

Event risk can lead to reputational damage to a business, an industry, or the entire financial market. The adverse impact of such risks can be minimized by employing adequate and proper risk management professionals.