Concept
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The first, and perhaps most obvious risk management technique, is avoidance. It is quite extreme and offers very little, if any, reward for the participant. An institution that is 100% risk averse would seek investment opportunities that charge them no risk premium –that is to say, assets that have not had a risk charge built into their capital repayment structure. An example of this would be investing in US Treasury Bills (or T-bills). This specific financial instrument is considered risk-free as it is backed by the US government which has never defaulted on its loan repayments.
It is obvious to see, however, that this risk-free approach only relates to default risk –i.e. the risk of the issuer missing repayments. Avoidance does not protect against inflation which erodes the value of money over time. It can therefore be argued that if inflation is present in the market environment, there will always be a risk of loss through inflation, even though default risk may be avoided through this technique.