CHAPTER 8 CATEGORIES AND MEASUREMENT OF RISK Flashcards
Define market risk.
Market risk is the risk from changes in the market price of key items, such as the price of key commodities. Market prices can go up or down, and a company can benefit from a fall in raw material prices or incur a loss from a rise in prices.
What is Business probity risk?
Probity means honesty and integrity. Business probity risk is the risk of losses from a failure to act in an honest way. Companies in some industries might be exposed to this type of risk.
What do you understand by residual risk?
Companies control the risks that they face. Controls cannot eliminate risks completely, and even after taking suitable control measures to control a risk, there is some remaining risk exposure. The remaining exposure to a risk after control measures have been taken is called residual risk
Define risk appetite.
Risk appetite is concerned with how much risk management are willing to take. Management might be willing to accept the risk of loss up to a certain maximum limit if the chance of making profits is sufficiently attractive to them.
For a market trader in the financial markets, risk appetite has been
defined as ‘the amount of capital that a trader is willing to lose in order to generate a potential profit.’
Explain risk map.
A risk map in its simplest form is a 2 × 2 matrix, where one side of the matrix represents the probability that an adverse outcome or event will occur, and the other side of the matrix represents the amount of the loss that is likely to occur when there is an adverse outcome.
The concept of a risk matrix is based on the assessment of risk as:
Risk = Probability of adverse event × Loss when an adverse event occurs.
A risk map can be used to place individual risks on the map. This provides a visual aid to understanding the nature and severity of each risk. It can be useful for management when risks are prioritized and decisions are taken about how risks should be managed.
What is a risk dashboard?
A risk dashboard is another visual aid for risk management. There are different ways of constructing a dashboard, but the basic idea is that it indicates which risks are dangerously high (coloured red), which are relatively small (coloured green) and which are somewhere between (coloured amber). A dashboard
can also be used to indicate the current exposures to the risk (residual risk) and the ‘risk appetite’ of the company for accepting exposures to the risk. Residual risk should not exceed the company’s appetite for that risk.
