Module 3: Intro to Risk Identification, Assessment And Management

Question 1

What is the difference between risk and uncertainty?

Answer 1

Risk is the possibility that an event will occur and adversely affect the achievement of objectives. This
is also known as downside risk.
Uncertainty is the inability to predict the outcome of an activity due to a lack of information.

Question 2

What are the environmental risks involved in international trade?

Answer 2

The benefits of international trade need to be considered in the context of the additional risk
involved:
 Both domestic and international traders will face trading risks, but the risks of international trade
will be higher due to the increased distances and times involved.
 Environmental risk relates to the country in which the company operates and its political, legal,
economic, social and cultural environment (see below).
 Legal restrictions may also exist in some markets, limiting ownership of securities by foreign
investors.
 Foreign exchange regulations may prohibit international investment or make it more expensive.
Transacting in foreign currency increases the variability of income streams.
 Double taxation of income from foreign investment may deter investors.
 There are likely to be higher information and transaction costs associated with investing in foreign
securities.

Question 3

Explain two types of foreign currency risk

Answer 3

Translation risk is the risk that the organisation will make exchange losses when the accounting
results of its foreign branches or subsidiaries are translated into the home currency.
Transaction risk is the risk of adverse exchange rate movements occurring in the course of normal
international trading transactions.

Question 4

Explain what interest rate risk is

Answer 4

Interest rate risk is the risk of higher or lower profits or losses than expected, as a result of uncertainty
about future movements in an interest rate, or the general level of interest rates.

Question 5

State two different risk classifications

Answer 5

 financial risk; interest rates, foreign exchange, credit

 strategic/business risk; competition, customer changes, industry changes, customer demand

 operational risk; regulations, culture, board composition

 hazard/events risk; contracts, natural events, suppliers, environment

Question 6

What does a quantitative risk assessment involve?

Answer 6

Quantitative risk assessment involves the determination of measured figures for
probabilities and consequences, producing a specifically quantified measure of risk.

Question 7

Explain the four possible strategies for managing risk

Answer 7

 risk avoidance – not undertaking the relevant activity
 risk reduction – taking steps to reduce the severity of the impact
 risk transfer – passing the risk to a third party through hedging or insurance
 risk retention – accepting the loss if and when it occurs.

Question 8

What are the three main ‘attitudes to’ or ‘appetites for’ risk?

Answer 8

-A risk averse attitude is that an investment should not be undertaken if there is an alternative
investment offering either the same return but with a lower risk or a higher return for the same risk.
However, an alternative investment might be undertaken if it has a higher risk, but offers a higher
expected return.
-A risk neutral attitude is that an investment should be chosen based on the expected (most likely)
return, irrespective of the risk.
-A risk seeking attitude is that an investment should be undertaken if it offers higher possible returns,
even if the risk is higher.