Ascertaining the Financial Loss from Non-dependable Events in Business Interactions by Using the Monte Carlo Method

Abstract

Risk Assessment in business interactions iscarried out to determine beforehand the occurrence of undesirable events and their associated consequences. In the literature, approaches have been proposed by which an interaction initiating agent can ascertain the occurrence of undesirable event/s and determine their consequences in an interaction. But those approaches just consider those events that are related to the performance of the other agent, with whom the interaction initiating agent is forming an interaction. It is possible that there may also be such events that are not dependent on the other agent's performance, but will directly or indirectly have an impact on the successful completion of the business interaction. In this paper, we will highlight the importance of considering such event/s during the process of risk assessment, and propose a methodology by which the interaction initiating agent can determine and quantify their effect on the successful completion of its business interaction. Keywords-risk assessment, financial risk, uncertainty, dependable events, non-dependable events. I.2009 International Conference on Availability, Reliability and Security 978-0-7695-3564-7/09 $25.00

A Fuzzy Approach for Transactional Risk Management in E-Business Collaborations

“…Further, the total financial risk should represent the variability of the different levels of financial losses that the risk assessing agent can experience over a given period of time, and not just represent the crisp financial loss that is represented by the Value at Risk (VaR) models. In our previous work, we developed comprehensive methodologies by which the risk assessing agent captures the variability of its investment over the interaction time period and captures the financial loss from both dependable [17] and non-dependable events [18].…”

Determining the Net Financial Risk for Decision Making in Business Interactions

“…The assessment criteria from the expectations of the interaction can broadly be divided into two categories, each of which has uncertainty associated with it. They are Dependable Criteria and Non-Dependable Criteria [11]. Dependable criteria are those assessment criteria from the expectations that are dependent on the performance of the risk assessed agent in the interaction (C1-C4).…”

“…To achieve this, in our previous work [11] we proposed that the risk assessing agent utilize the Monte Carlo simulation to model the uncertainty associated with the type of non-dependable criteria that are being considered in the current example. The Monte Carlo technique is not a model which gives a deterministic output at each simulation, but is a method for iteratively evaluating a deterministic model using sets of random variables as inputs for the defined problem.…”

“…In order to determine the financial loss that could be experienced from the non-dependable assessment criteria, we proposed in Hussain et al [11] that the risk assessing agent from the simulation results plot the Factual Cost Curve (FCC) of the interaction and plot its maximum investment capacity (MIC) on it. Factual Cost Curve, as shown in Figure 2 represents the probability of an amount (in Euros) which the risk assessing agent might end up paying to the risk assessed agent due to the different values of occurrence of the non-dependable uncertain variable of its interaction.…”

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“…The detailed steps by which the variability in the investments of resources is captured and then the effect of dependant and non-dependant uncertainties is determined on them are mentioned in [23,24]. To clarify, let us consider that there are 5 time slots in risk assessing agent 'A's interaction with the logistics company; and it invests its resources in each of those in the order of $2,000, $3,000, $1,000, $2,000 and $2,000.…”