Module 3 Flashcards
situations where there’s a possibility of loss
pure risk
situations where there’s a chance for both loss and gain
speculative risk
is the risk of losing money if the price of a commodity changes (for producers & users)
commodity price risk
is the risk of loss caused by adverse interest rate movements
interest rate risk
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
currency exchange rate risk
Examples of Financial Risks
Individuals face financial risks in many aspects of their lives. These risks come in the form of:
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:
this includes unemployment, underemployment, health issues, disability, and premature death.
Risk of unemployment or loss of income:
this includes incurring higher expenses than budgeted or having to deal with unforeseen
emergency expenses.
Risk of higher or unexpected expenses:
this includes potential declines in the value of assets/investments, as well as potential damage
and theft of assets.
Risk related to assets/investments:
this includes being unable to service credit card debt, asset loans, mortgages, and so on.
Risks related to debt or credit financing:
For corporations and financial institutions, there are additional types of risks faced, such as:
Market Risk
Credit Risk
Liquidity Risk
Operational Risk
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.
market risk
the risk that a counterparty may default on their contractual obligations, for example, an individual defaulting on their
personal loan.
credit risk
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.
liquidity risk
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.
operational risk
Managing financial risks: 8 methods to safeguard your finances
- Invest wisely
- develop effective cash flow management strategies
- diversify your investment
- increase your revenue streams
- set aside funds for emergencies
- reduce your overhead costs
- get the right business insurance
- get a trusted management accountant
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.
invest wisely
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.
develop effective cash flow management strategies
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.
diversify your investment
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.
increase your revenue streams
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.
set aside funds for emergencies
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.
reduce your overhead costs
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.
get the right business insurance
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.
get a trusted management accountant
is a risk treatment technique that combines coverage for pure and speculative risks in
the same contract
an integrated risk management program
is a provision that provides for payment only if two specified losses occur
a double-trigger option
is responsible for the treatment of pure and speculative risks faced by the organization
chief risk officer
is a comprehensive risk management program that addresses the organization’s pure, speculative, strategic, and operational risks
Enterprise Risk Management (ERM)
refers to uncertainty regarding an organization’s goals and objectives
strategic risk
are risks that develop out of business operations, such as product manufacturing
operational risk
How to Implement Enterprise Risk Management Practices
Define risk philosophy
Create action plans
Be creative
Maintain flexibility
Continually monitor
Before implementing any practices, a company must identify how it feels about risk and what its strategy around risk will be.
define risk philosophy
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
create action plans
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.
be creative
- 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.
maintain flexibility
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.
continually monitor
Decisions about whether to retain or transfer risks are influenced by conditions in the insurance marketplace
insurance market dynamics
Three important factors that influencing the insurance market are:
The underlying cycle
Consolidation in the insurance industry
Securitization of risk
refers to the cyclical pattern of underwriting stringency, premium levels, and profitability
The underwriting cycle
refers to the combining of businesses through acquisitions or mergers
consolidation
the boundaries between insurance companies and other financial institutions have
been struck down
cross-industry consolidation
means that insurable risk is transferred to the capital markets through creation of a financial instrument:
securitization of risk
permits the issue to skip or defer scheduled payments if a catastrophic loss occurs
catastrophe bond
is an option that derives value from specific insurance losses or from an index of values.
insurance option
provides a payment if a specified weather contingency (e.g., high temperature) occurs
weather option
The risk manager can predict losses using several different techniques:
- Probability analysis
- Regression Analysis
- Forecasting base don loss distribution
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)
probability analysis
events if the occurrence of one event does not affect the occurrence of the
other event
independent events
if the occurrence of one event affects the occurrence of the other
dependent events
if the occurrence of one event precludes the occurrence of the second event
mutually exclusive
characterizes the relationship between two or more variables and then uses this characterization to predict
values of a variable
regression analysis
is the sum of the present values of the future cash flows minus the cost of the project
net present value
on a project is the average annual rate of return provided by investing in the
project
internal rate of return
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
risk management information system
Other Risk Management Tools
- risk management information system
2.risk management intranets and web sites - risk map
- value at risk (var) analysis
- catastrophe modelling
- Have a Plan for How To Manage Scope Change
is a web site with search capabilities designed for a limited, internal audience
intranet
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
risk map
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
value at risk (var) analysis
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
catastrophe modelling
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.
scope change
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.
scope creep
How Scope Changes Impact Your Project
impact on time and cost
impact on quality
impact on the project risk
The further into the project life cycle you are, the costlier scope changes get — whether that be financial-based or risk-based.
impact on time and cost
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.
impact on quality
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.
impact on the project risk
Tips for Managing Scope Change
- Put the Project’s Success Top of Mind
- Define the initial project scope
- document proposed scope changes in your backlog
- Understand the Impact in Scope, Schedule, and Budget
- Communicate changes to the team
- Have a Plan for How To Manage Scope Change
- Learn from past scope changes
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.
Put the Project’s Success Top of Mind
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.
Define the initial project scope
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.
document proposed scope changes in your backlog
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.
Understand the Impact in Scope, Schedule, and Budget
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.
communicate changes to the team
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.
Have a Plan for How To Manage Scope Change
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.
learn from past scope changes
