they assume risk by choice and not by chance is value enhancing. however, hedging through market instruments results in a redistribution of risks. ideally, if this redistribution is done on the basis of a scientific appraisal of the optimal level and combination of risks for each entity it may result in an overall reduction of risks at the macro level. but the economy as a whole would still be exposed to risks. also, for proper functioning of hedging products it is essential that expectations about the risk variable should be heterogeneous. if price movements are unidirectional for a long time, protection sellers demand large premium from protection buyers. apart from the above, there are more subtle issues concerning risk management. it is well - known that markets flagrantly violate some of the postulates and assumptions of traditional mathematical finance. the volatility of financial prices and the tendency of this volatility to occur sometimes in episodes generally unrelated to any clearly exogenous news about fundamentals has been a subject of research for a long time in behavioural finance. the behavioral dimensions of risk management and hedging have attracted much attention in the recent years among academics and researchers. among other things, hedging decisions of any entity are influenced by two important factors : ( a ) stance of the competitors in this regard ; and ( b ) anomalies of human behaviour. the latter - mentioned aspect is significant : most often entities do not always have the intellectual or emotional impulse to take on risks and deal with them before they impinge on performance and it is too late. many do not feel the same way when they buy a luxury car and when they buy insurance for the same car. when we are educated to risk management possibilities, we become aware of the rich potential that finance has for improving human welfare, but we do not find it emotionally easy always to take advantage of this potential. experienced traders know it too well how difficult it is at times to quit a loss - making position. the field of risk management needs to design its methods to minimize the human weakness in risk management. finally, have adoption of risk management and use of risk mitigation products made the financial markets a safer place than before? it is a tough call to take. in a recent interview, professor robert merton, who along with myron scholes and fischer black invented the famous option pricing formula in the early 1970s, reportedly said, “ the real story is not what happened to ltcm in 1998 but

“ risk engines ” ; they take risks, they transform them and they embed them in their products and services. there are powerful motives for banks to implement risk - based practices ; to provide a balanced view of risk and return from a management point of view, to develop competitive advantages and to comply with regulatory requirements. as is the case globally, banks in india have a very special role to play in promoting better risk management standards and practices. being the chief repositories of credit risk, the quality of their loan assets depends critically on how effective the risk management policies, processes and procedures of their borrowers are. among their borrowing clients themselves, there would be differentiated risk - bearing expertise and hence banks are expected to provide professional advice to their clients on risk management. thus, banks have good business reasons for acquiring specialization and professional expertise in risk management. this would, however, be possible only if banks themselves are good managers of their own risks. there is another related issue, albeit a slightly deeper one. in contrast to the capital market, banks are privy to much more wide and rich information in respect of their clients. while the comparative advantage of banks in intermediating financial resources hinges on their being able to enjoy economies of scale and scope in acquiring and processing information in the first place, a relevant issue in this context is whether this information is being put to optimal use for managing risks, both at the level of individual banks and also at the aggregate level. although it is early days to assess the effectiveness of the institutional mechanism provided by credit information bureaus for the pooling of critical borrower information for common use within certain important safeguards, the importance of more intensive and extensive use of information hardly needs to be overemphasized. further, as the economy grows and new types of activities and enterprises appear on the scene, it would be an imperative for banks to be able to assess the risks associated with such activities and enterprises. as is the case elsewhere, this will also critically depend on collection and analysis of all relevant information. business approach to risk management risk management is an integral part of the overall business planning and management and not something on the fringes or “ add on ”. when rbi introduced the asset liability management ( alm ) framework in 1999, it was viewed by some banks initially as an exercise for finding out maturity mismatches or re - pricing mismatches. it was only when banks began compiling alm statements that they realized the benefits of pursuing pro - active