Introduction to risk management

Question 1

Why do we manage risk?

Answer 1

Hedging creates enterprise value through:
preventing treasure/cash flows problems
reducing external financial costs
decreasing bankruptcy costs
mitigating the risk of underinvesting
reducing the PV of taxes payable

Question 2

What are the 4 types of behaviours towards risk?

Answer 2

risk retention (doing nothing)
risk avoidance (not performing an activity that could be risky)
risk transfer (insurance and hedging with financial derivatives)
risk reduction (actively trying to reduce either the likelihood or the severity)

Question 3

What are types of risk?

Answer 3

financial (market, credit and liquidity), strategic and operational

Question 4

What is market risk?

Answer 4

variation in prices of commodities, exchange rates, asset returns

Question 5

What is credit risk?

Answer 5

probability of defaultt

Question 6

what is liquidity risk?

Answer 6

risk of not possessing sufficient funds to meet short-term financial obligations

Question 7

What are some of the financial risks that are externally driven?

Answer 7

interest rates, foreign exchange, credit

Question 8

What are some of the financial risks that are internally driven?

Answer 8

liquidity and cash flows

Question 9

What are some of the strategic risks that are externally driven?

Answer 9

competition, customer changes, industry changes, customer demand

Question 10

What are some of the strategic risks that are internally driven?

Answer 10

research and development, intellectual capital

Question 11

What are some of the operational risks that are externally driven?

Answer 11

regulations, culture, board composition

Question 12

What are some of the operational risks that are internally driven?

Answer 12

accounting controls, information systems, recruitment, supply chain

Question 13

What are some of the hazard risks that are externally driven?

Answer 13

contracts, natural events, suppliers, environment

Question 14

What are some of the hazard risks that are internally driven?

Answer 14

public access, employees, properties, products and services

Question 15

What are the 4 steps in the risk management process?

Answer 15

1. assessment and evaluation risk
2. risk reporting
3. risk treatment
4. risk management process monitoring

Question 16

What are the 2 risk management strategies that a firm can have?

Answer 16

managing risk before or after its occurrence