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Risk Management > Module 3 > Flashcards

Module 3 Flashcards

1
Q

situations where there’s a possibility of loss

A

pure risk

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2
Q

situations where there’s a chance for both loss and gain

A

speculative risk

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3
Q

is the risk of losing money if the price of a commodity changes (for producers & users)

A

commodity price risk

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4
Q

is the risk of loss caused by adverse interest rate movements

A

interest rate risk

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5
Q

is the risk of loss of value caused by changes in the rate at which one nation’s currency may be converted to another nation’s currency

A

currency exchange rate risk

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6
Q

Examples of Financial Risks
Individuals face financial risks in many aspects of their lives. These risks come in the form of:

A

Risk of unemployment or loss of income:
Risk of higher or unexpected expenses:
Risk related to assets/investments:
Risks related to debt or credit financing:

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7
Q

this includes unemployment, underemployment, health issues, disability, and premature death.

A

Risk of unemployment or loss of income:

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8
Q

this includes incurring higher expenses than budgeted or having to deal with unforeseen
emergency expenses.

A

Risk of higher or unexpected expenses:

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9
Q

this includes potential declines in the value of assets/investments, as well as potential damage
and theft of assets.

A

Risk related to assets/investments:

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10
Q

this includes being unable to service credit card debt, asset loans, mortgages, and so on.

A

Risks related to debt or credit financing:

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11
Q

For corporations and financial institutions, there are additional types of risks faced, such as:

A

Market Risk
Credit Risk
Liquidity Risk
Operational Risk

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12
Q

the risk that losses may occur to financial assets based on the dynamics of the overall financial markets, for example, an equity security losing a substantial portion of its value.

A

market risk

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13
Q

the risk that a counterparty may default on their contractual obligations, for example, an individual defaulting on their
personal loan.

A

credit risk

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14
Q

the risk that funding obligations may not be met due to cash constraints, for example, a bank not having enough cash
on hand to meet deposit withdrawal demand.

A

liquidity risk

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15
Q

the risk that losses occur as a result of failed internal processes, people, and systems. For example, an employee making a mistake on a transaction that results in a monetary loss.

A

operational risk

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16
Q

Managing financial risks: 8 methods to safeguard your finances

A
  1. Invest wisely
  2. develop effective cash flow management strategies
  3. diversify your investment
  4. increase your revenue streams
  5. set aside funds for emergencies
  6. reduce your overhead costs
  7. get the right business insurance
  8. get a trusted management accountant
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17
Q

Risks associated with investments are one of the strongest and most palpable financial risks you can encounter. Luckily, there are many ways to learn the ropes to investing before giving it a final go. Make sure to gather enough information
before you make any investment decisions. In this regard, consulting with your accountant can be a great help, as they can give you sound advice on how you can maximize your returns.

A

invest wisely

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18
Q

Understanding how you spend cash is just as important as knowing your risks. Cash flow management — or the practice of keeping your cash flow in optimal condition — is one of the best ways to secure a financially-stable future and safeguard your bottom line from dangers.

A

develop effective cash flow management strategies

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19
Q

Diversification is indispensable in mitigating financial risks. By spreading out your investments among different financial instruments, you can minimize their potential risks while having a fallback in case things go awry for your
business.

A

diversify your investment

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20
Q

When your business experiences a slowdown, having an alternative source of income can help you pay the bills. For instance, aside from your primary business, you can get low-risk investments or seek opportunities to get grants and subsidies from the government.

A

increase your revenue streams

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21
Q

Consider saving some of your ROI in your savings account. While your savings account will
not yield significant long-term interest, it is still one of the safest ways to stash your money. Moreover, your savings account can also help you transfer cash electronically, paving the way for a quicker and more convenient financial transaction process.

A

set aside funds for emergencies

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22
Q

Overspending on your overhead costs — or the costs associated with your daily operations but not related to profit generation — can also be damaging to your bottom line. By reducing your overhead costs, you can maintain
your daily operations sustainably while increasing your business savings.

A

reduce your overhead costs

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23
Q

Insurance can act as your business’s safety net, but only when you don’t overspend on
premiums. However, you also don’t want to be underinsured. The key is to identify which type of insurance can provide the
protection you need against huge financial losses from accidents, lawsuits, natural resources or other unexpected incidents.

A

get the right business insurance

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24
Q

There’s nobody who can help you with managing your cash flow and making savvy
business financial decisions better than your accountant. Talk to your trusted and reliable accountant to help you with different facets of your business finances, be it in paying off your debts or rounding up investment returns.

A

get a trusted management accountant

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25
Q

is a risk treatment technique that combines coverage for pure and speculative risks in
the same contract

A

an integrated risk management program

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26
Q

is a provision that provides for payment only if two specified losses occur

A

a double-trigger option

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27
Q

is responsible for the treatment of pure and speculative risks faced by the organization

A

chief risk officer

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28
Q

is a comprehensive risk management program that addresses the organization’s pure, speculative, strategic, and operational risks

A

Enterprise Risk Management (ERM)

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29
Q

refers to uncertainty regarding an organization’s goals and objectives

A

strategic risk

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30
Q

are risks that develop out of business operations, such as product manufacturing

A

operational risk

31
Q

How to Implement Enterprise Risk Management Practices

A

Define risk philosophy
Create action plans
Be creative
Maintain flexibility
Continually monitor

32
Q

Before implementing any practices, a company must identify how it feels about risk and what its strategy around risk will be.

A

define risk philosophy

33
Q

With a company’s risk philosophy in hand, it is time to create an action plan. This defines the steps a company must take to protect its assets and plans to protect the future of the organization after a risk

A

create action plans

34
Q

When considering risks, ERM entails thinking broadly about the problems a company may face. Though far-fetched, it is in a company’s best interest to think of as many challenges it may face and how it will respond (or decide to not respond) to should the event happen.

A

be creative

35
Q
  • As companies and risks evolve, a company must design ERM practices to be adaptable. The risks a company faces one day may be different the next; the company must be able to carry its current plan while still making plans for new, future risks.
A

maintain flexibility

36
Q

Once ERM practices are in place, a company must ensure the practices are adhered to. This means tracking progress towards goals, ensuring certain risks are being mitigated, and employees are performing tasks as expected.

A

continually monitor

37
Q

Decisions about whether to retain or transfer risks are influenced by conditions in the insurance marketplace

A

insurance market dynamics

38
Q

Three important factors that influencing the insurance market are:

A

The underlying cycle
Consolidation in the insurance industry
Securitization of risk

39
Q

refers to the cyclical pattern of underwriting stringency, premium levels, and profitability

A

The underwriting cycle

40
Q

refers to the combining of businesses through acquisitions or mergers

A

consolidation

41
Q

the boundaries between insurance companies and other financial institutions have
been struck down

A

cross-industry consolidation

42
Q

means that insurable risk is transferred to the capital markets through creation of a financial instrument:

A

securitization of risk

43
Q

permits the issue to skip or defer scheduled payments if a catastrophic loss occurs

A

catastrophe bond

44
Q

is an option that derives value from specific insurance losses or from an index of values.

A

insurance option

45
Q

provides a payment if a specified weather contingency (e.g., high temperature) occurs

A

weather option

46
Q

The risk manager can predict losses using several different techniques:

A
  1. Probability analysis
  2. Regression Analysis
  3. Forecasting base don loss distribution
47
Q

the risk manager can assign probabilities to individual and joint events

– The probability of an event is equal to the number of events likely to occur (X) divided by the number of exposure
units (N)

A

probability analysis

48
Q

events if the occurrence of one event does not affect the occurrence of the
other event

A

independent events

49
Q

if the occurrence of one event affects the occurrence of the other

A

dependent events

50
Q

if the occurrence of one event precludes the occurrence of the second event

A

mutually exclusive

51
Q

characterizes the relationship between two or more variables and then uses this characterization to predict
values of a variable

A

regression analysis

52
Q

is the sum of the present values of the future cash flows minus the cost of the project

A

net present value

53
Q

on a project is the average annual rate of return provided by investing in the
project

A

internal rate of return

54
Q

is a computerized database that permits the risk manager to store and analyze risk
management data

– The database may include listing of properties, insurance policies, loss records, and status of legal claims
– Data can be used to predict and attempt to control future loss levels

A

risk management information system

55
Q

Other Risk Management Tools

A
  1. risk management information system
    2.risk management intranets and web sites
  2. risk map
  3. value at risk (var) analysis
  4. catastrophe modelling
  5. Have a Plan for How To Manage Scope Change
56
Q

is a web site with search capabilities designed for a limited, internal audience

A

intranet

57
Q

is a grid detailing the potential frequency and severity of risks faced by the organization

– Each risk must be analyzed before placing it on the map

A

risk map

58
Q

involves calculating the worst probable loss likely to occur in a given time period under regular market
conditions at some level of confidence

– The VAR is determined using historical data or running a computer simulation
– Often applied to a portfolio of assets
– Can be used to evaluate the solvency of insurers

A

value at risk (var) analysis

59
Q

is a computer-assisted method of estimating losses that could occur as a result of a catastrophic event
– Model inputs include seismic data, historical losses, and values exposed to losses (e.g., building characteristics)
– Models are used by insurers, brokers, and large companies with exposure to catastrophic loss

A

catastrophe modelling

60
Q

is exactly what it sounds like: a change to the scope of a project. Scope changes are deviations from what was
originally agreed upon in terms of functionality, layout, quality, and responsibilities. These changes to a project’s scope could be the result of new requests and data or unclear requirements.

A

scope change

61
Q

is what happens when the project scope changes without conscious thought about the consequences. In other words,
without going through a proper change control process.

A

scope creep

62
Q

How Scope Changes Impact Your Project

A

impact on time and cost
impact on quality
impact on the project risk

63
Q

The further into the project life cycle you are, the costlier scope changes get — whether that be financial-based or risk-based.

A

impact on time and cost

64
Q

Ideally, you should never compromise project quality — scope changes or not. But unfortunately, that’s not always
the case when you have a drop-dead deadline.

A

impact on quality

65
Q

The more changes you make, and the later the changes are in the project lifecycle, the greater the risk of running into scope creep, delays, and complications.

A

impact on the project risk

66
Q

Tips for Managing Scope Change

A
  1. Put the Project’s Success Top of Mind
  2. Define the initial project scope
  3. document proposed scope changes in your backlog
  4. Understand the Impact in Scope, Schedule, and Budget
  5. Communicate changes to the team
  6. Have a Plan for How To Manage Scope Change
  7. Learn from past scope changes
67
Q

Think of the project’s success (i.e., the goals and purpose of the project) as your North Star.
It should always be what you look to when evaluating the validity of scope changes.

A

Put the Project’s Success Top of Mind

68
Q

The foundation for scope management is scope definition. To meet the goals of a project, you need to create a structured approach for defining, evaluating, and approving scope changes.

A

Define the initial project scope

69
Q

A great approach for defining all of the work required to complete a project is to visualize and evaluate the product backlog — from the
request to the point of production.

A

document proposed scope changes in your backlog

70
Q

It’s always important to understand whether your progress is on track.
To understand the impact of a proposed scope change, you can use a burndown chart that visualizes the ideal progress of stories vs. the actual progress.
This allows you to judge what changing the scope of the project does to your timeline.

A

Understand the Impact in Scope, Schedule, and Budget

71
Q

Documenting and modeling scope change isn’t the end of the process — but this is where many teams run into issues. Communicating these changes to your team is a crucial step to prevent a lack of clarity and undefined objectives.

A

communicate changes to the team

72
Q

The biggest tip to remember is that in order to effectively manage change, you first need to have a plan in place. But how do you know if you have the right people assigned to the right tasks and that your plan will work? It starts with resource management.

A

Have a Plan for How To Manage Scope Change

73
Q

Everybody is different and offers unique perspectives and skills. This means the right scope change process will be unique to your organization and stakeholders. And the best way to design it is to
learn through experience.

A

learn from past scope changes

Risk Management (9 decks)

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