Chapter 11 Risk Management Flashcards
The process of measuring or assessing risk and developing strategies to management.
Risk Management
Define (ISO)
International Organization of Standardization
Things that risk management should do
- Create Value
- Address uncertainty and assumptions
- Be an integral part of the organizational processes and decision making
- Be dynamic, iterative, transparent, tailor able, and responsive to change
- Create capability of continual improvement and enhancement considering the best available
Information and human factors - Be systematic, structured and continually or periodically reassessed
The process of risk management consists of several steps
- Establishing the Context
- Identification of potential risk
- Risk assessment
Establishing the context involve
a. Identification of risk in a selected domain or interest
b. Planning the remainder of the process
c. Mapping
d. Defining a framework for the activity and an agenda for identification
e. Developing a. Analysis of risks involved in the process
f. Mitigation or solution of risks using available technological, human and organizational resources
Mapping out the following
- The social scope of risk management
- The identity and objectives of stakeholders
- The basis upon which risks will be evaluated, constraints
Can start with the analysis of the source of problems or with the analysis of the problem
Identification of potential risks
Common risk identification methods are
A. Objective based risk
B. Scenario based risk
C. Taxonomy based risk
D. Common risk checking
E. Risk charting
Once risks have been identified their potential severity of impact and the probability of occurrence must be assessed
Risk Assessment
The Factors usually considered with respect to investments are.
- Business Risk
- Financial Risk
- Liquidity Risk
- Default Risk
- Interest Rate Risk
Refers to the uncertainty about the rate of return caused by the nature of the business.
Business Risk
Related to the probability, that some or all of the initial investment will not be returned.
Default Risk
The firm’s capital structure or sources of financing determine
Financial Risk
Most commonly associated with bond price movements, rising interest rates cause bond prices to decline and declining interest rate cause bond prices to rise.
Interest Rate Risk
Is associated with the uncertainty created by the inability to sell the investment quickly for cash.
Liquidity Risk
Decisions made by a firm’s management and board of directors materially affected the risk faced investors.
Management Risk
It is easy to observe the decline in the price of a stock or bond, but it is often more difficult to recognize that the purchasing power of the return you have earn on an investment has declined (risen) as a result of inflation (deflation).
Purchasing Power Risk
Risk associated with manufacturing, trading and service concerns
A. Market Risk
B. Operations Risk
C. Financial Risk
D. Business Risk
Under Market Risk
A. Production Risk
B. Competitor Risk
Under Operations Risk
A. process stoppage
B. Health and safety
C. After sales service failure
D. Environmental
E. Technological Obsolescence
F. Integrity
Under Financial Risk
A. Interest rate volatility
B. Foreign currency
C. Liquidity
D. Derivative
E. Viability
Under Business Risk
A. Regulatory Change
B. Reputation
C. Political
D. Regulatory and legal
E. Shareholder relations
F. Credit rating
G. Capital availability
H. Business interruptions
This includes performing an activity that could carry risk
Risk Avoidance
Involves reducing the severity of the loss or the likelihood of the loss from occurring
Risk Reduction
Means sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk
Risk sharing
Involves accepting the loss or benefit of gain from a risk when it occurs
Risk retention
Is the technique for measuring, monitoring and controlling the financial or operational risk on a firm’s balance sheet
Risk management
The most commonly encountered areas of risk management include
- Enterprise risk management
- Risk management activities as applied to project management
- Risk management for megaprojects
- Risk management of information technology
- Risk management techniques in petroleum and natural gas
