Okay, here is the translation following your instructions: Risk Cost Management Theory

Author: Lin Wanxiang, Gou Jun / Country: Mainland China
Publisher:
Publish Date: 2006-05-01
Features:
3. The Origin and Derivation of Risk. Origin refers to the fact that the outbreak of risk, from a spatial perspective, generally has a point of origin; from a carrier perspective, there is a specific entity bearing the risk. Derivation, on the other hand, refers to how a risk is transmitted or spreads through certain channels, media, or infections to other carriers and regions, triggering or causing the occurrence of other types of risks—i.e., derivative risks or secondary risks—thus amplifying the scope of impact and influence of the risk and exacerbating its harmful effects. For example, the 1997 Southeast Asian financial crisis originated in Thailand. From a carrier perspective, there was a specific entity—the depreciation of the Thai baht against the U.S. dollar—and it rapidly spread through various channels, media, or infections to other carriers and regions, significantly expanding the scope of impact and influence of Thailand's financial risks.
The reasons for the derivation or contagion of risk are multifaceted. In brief:
First, enterprises exist in close and complex relationships of debts, financial ties, and financial transactions. If one or a few enterprises face financial risks or payment risks, or even bankruptcy, it will affect other businesses with which they have business connections, thereby increasing systemic risk.
Second, information asymmetry prevents creditors from assessing a company's solvency based on public information in the same way they would for other industries. As a result, creditors may perceive the difficulties of one company as a signal of difficulties in institutions with superficially similar businesses, triggering distrust of other companies—i.e., "herd behavior" under the "prisoner's dilemma."
Third, the widespread use of modern communication and electronic technologies has both positive effects in improving the stability and efficiency of business operations and negative effects in expanding and spreading risks. Under the broader trends of financial liberalization, globalization, and electronicization, risks within a local or small system can quickly evolve into global risks through electronic trading systems or clearing and payment systems, significantly amplifying their harmful effects. For example, the 1995 collapse of Barings Bank in the UK was caused by Nick Leeson, a bank employee, who used advanced electronic communication technology to speculate on the Nikkei index in Singapore, resulting in massive losses.
Fourth, the international market system has severe limitations, with free and open markets coexisting alongside closed or semi-closed markets, creating institutional friction and conflicts between them. This can transform risks from one country or region into another type of risk under a different system, leading to chain reactions or variant reactions. From this perspective, controlling the origin of risk is of paramount importance—what we commonly refer to as "stemming the source." When the source of risk is not controlled, it is essential to promptly cut off all possible transmission channels to weaken the risk and mitigate its negative impact.
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