An intro to risk Flashcards
What does it mean to take rational risk?
It’s to make decisions based on proven, tested & available data and being able to update your decisions based on new data.
What is risk appetite and types of risk reponses?
1) RA is the level of risk that an org is prepared to accept in pursuit of its objectives.
2) RT: Risk Lover(upside potential grows with risk), risk neutral(both), risk averse(upside potential to grow more than risk)
Traditional vs EWRM approach and their pros and cons?
1) Trad: This approach gives each department powers to manage it’s risk policy to meet it’s own specific needs.
cons: Duplication, limited links to overall objective of co and feedback loops.
2) EWRM: Policy makers will plan the RM framework to meet the overall risk approach of the co while taking into account different departmental needs.
Pro: Builds consistency & alignment of functions while reducing duplication. Proactive approach to RM
What are the 5 key RM objectives?
1) ID & prioritise potential risk events.
2) Develop RM strategies & plans.
3) Use RM methods, tools & techniques to analyse & report risk events.
4) Evaluate risk.
5) Develop new strategies & plans.
What is a RM framework & what role does the RM committe and CT play?
RM FW: Provides an org with a mechanism to develop an overall approach to manage risks through discussion, comparison, evaluation & control.
RM Com: Sets risk appetite, instruments, limits and targets. Authorise & approves instruments for invest, borrowing, hedging & financing decisions while being responsible for effective internal controls.
CT: Creates detailed treasury procedure, manages day to day exposures and ensures board policies are followed.
What is risk classification and classes of risk?
RC: Helps ID risk sources & enables consistent treatment of similar types of risks.
Risk Classes:
1) Commercial
2) Financial
3) Operational
4) Fin Markets
5) Credit
6) Liquidity
7) Pension
What is risk ID and the use of a risk register?
Risk ID: Definition, identification & class of risk exposures & their sources.
Risk Register: Document listing all risks a co faces & how its being dealt with breaking it up into:
1) Risk Category
2) Risk description
3) Impact & frequency
4) RM method used
5) Residual Risk(spill over)
6) Monitoring/ warning mechanisms
7) Risk owner(functions/departments)
What are the 5 key Risk Measurement methods?
1) Stats: Expected value & probability
2) Sensitivity Analysis: NPV
3) Simulation: Super computers
4) Value of risk: Max & Min of losses
5) Maximum loss
What are the 4 types of risk responses?
1) Avoid
2) Accept risk & retain(when immaterial)
3) Accept risk & reduce(Internal, diversifi)
4) Accept risk & transfer(Hedging)
What is hedging and the 2 ways to internally hedge?
1) To try neutralize impact of fluctions on market variables to reduce volatility.
2) Invoice currency: Getting buyers to pay in local currency to avoid transaction risk. Leading & lagging
3) Match receivables & payables into the same currency for netting.
Hedging strategies
1) Conservative
2) Aggressive
3) Partial
4) Speculation
What guides the treasury’s response to risk?
1) Corporate risk structure
2) Set up of treasury: Cost centre, value added centre or profit centre.
3) Competitors & benchmarking
4) Materiality & volatility
5) Incentive schemes for alignment of corporation & employee.
What is a risk management policy?
Formal framework reflecting co’s risk appetite by taking into account shareholder expectations, firms risk attitude, financial risk position. industry competitive position & potential risks.
