Chapter26-Risk identification and classification

Question 1

Framework

Answer 1

1 Identifying risks associated with a project
2 Categories of risk that could be used in a risk matrix for a typical project (PNEFCPB)
3 Wider risk identification techniques
4 Define risks faced by an insurance company
5 Market risk subdivisions
6 Constraints on perfect asset-liability matching (Same as CH16 card 20 - pure matching not possible)
7 Examples of credit risk
8 The security of a debt and of the borrower
9 Definition of a credit rating
10 Define a liquid asset
11 Reason banks are exposed to significant liquidity risk
12 Examples of business risks
13 Examples of operational risks
14 Identifying and analysing operational risks
15 Examples of eternal risks
16 Non-business risks for an insurance company

Question 2

Identifying risks associated with a project (9)

Answer 2

High-level preliminary analysis to confirm that there are no big risks that mean it is not worth continuing

Brainstorming with project experts and senior internal / external people to:

– identify likely / unlikely, upside / downside risks

– discuss these risks and their interdependency

– broadly evaluate the frequency and severity of each risk

– generate and discuss initial mitigation options

Desktop analysis to supplement brainstorming, which involves looking at similar projects undertaken by the sponsor and others

Consult with experts who are familiar with the details of the project and the plans for financing it

Risk register or risk matrix setting out risks and their interdependencies

Question 3

The security of a debt and of the borrower (4)

Answer 3

1. The nature of the debt (eg debenture, unsecured)
2. The covenant of the borrower (eg credit rating, income and asset cover, level of gearing, prior ranking debt, ability to raise more debt, future prospects of the borrower)
3. Market circumstances and the relative negotiating strength of borrower and lender
4. What security is available and whether it can be realised if necessary (eg the existence of any charges against the borrower’s assets – fixed or floating – and the assets to which a fixed charge is secured)