Identifying Risk Flashcards
What is risk in the context of risk management?
Risk exists whenever a future outcome or event cannot be predicted with certainty, and a range of different possible outcomes or events might occur. Risks can be divided into two categories: pure risks and speculative risks.
What is pure risk, and can you provide an example?
Pure risk(internal risk, operational risk), also known as downside risk, is a risk where there is a possibility of an adverse event occurring. Events might turn out worse than expected, but they cannot be better than expected. An example is a safety risk where employees might be injured by machinery, or the risk of a company strike affecting operations.
Other examples:
- Natural Disasters:
- Product Liability:
- Theft or Vandalism:
- Workplace Injuries:
What is speculative risk, and can you provide an example?
Speculative risk(business risk, strategic risk, enterprise risk), also called two-way risk, exists when the actual future event or outcome might be either better or worse than expected. For example, an investor in shares faces speculative risk because the market price of the shares might go up (profit) or down (loss).
Other examples:
- Real Estate Investment:
- 2. Foreign Exchange Trading:
- 3. Research and Development:
- 4. Stock Market Investment:
What is an example of strategic and operational risks in a business decision?
If a company commissions a new information system, the strategic risk is that customers might not want to buy goods online, while operational risks include the system failing due to hardware or software faults. Both types of risk need to be managed accordingly.
How do pure risks and speculative risks differ in terms of control and business implications?
Pure risks can often be controlled through internal controls or insurance and are usually called internal control or operational risks. Speculative risks, or business risks, cannot be avoided and are necessary for making profits. Companies must decide what level of speculative risks are acceptable.
What are the key elements of a risk management system?
Key elements of a risk management system include:
- a culture of risk awareness,
- a system for identifying, assessing, and measuring risks,
- an efficient system of risk communication to managers and the board,
- and, continuous monitoring of strategies and risks.
Define risk management in the context of corporate governance.
Risk management is the process of managing both downside risks and business risks. It involves the culture, structures, and processes focused on achieving opportunities while controlling unwanted results. It is a corporate governance issue where the board of directors safeguards company assets and shareholder investments.
What does the SECP’s Code of Corporate Governance in Pakistan state about risk management?
The SECP’s Code of Corporate Governance states that directors should report on governance, risk management, and compliance issues, including reputational risk, and address risk analysis, risk management, and risk communication.
How should a company organize for risk management?
A company should involve the board of directors in regularly reviewing the risk management system and possibly establish a Risk Management Committee. At the operational level, a senior management committee, potentially chaired by the CEO, should monitor and coordinate risk management throughout the organization.
What are the business benefits of effective risk management?
Effective risk management leads to increased likelihood of;
- achieving objectives,
- proactive management,
- better identification of opportunities and threats,
- compliance with legal and regulatory requirements,
- improved governance,
- enhanced stakeholder confidence,
- reliable decision-making,
- and more efficient allocation of resources for risk treatment.
