PART 3 RISK Flashcards
Is an uncertain event that may have a positive or negative impact on the business or project or undertaking
Risk
High rewards that potentially come up with opportunity and higher risk that have to be borne as a consequence of danger
Risk
The lesser the risk in a given investment the lesser the opportunity for gain
True
You can also be said that no risk…
No reward
We should be totally avoided we should not understand risk in order to manage them effectively
False
Is the business function used to plan organize and control all available resources to reach company goals
Management
The systematic process of managing an organization’s risk exposure to achieve its objective
Risk management
It is a set of coordinated activities to direct and control an organization with regard to risk
Risk management
It deals with the identification assessment and various strategies that help mitigate the adverse effects of risk on the organization
Risk management
Purpose of risk management
To mitigate the loss of property and increase the success chance of the organization
To identify potential events that may affect the entity and manage risk to be within its risk appetite in order to provide reasonable assurance regarding the achievement of entity objective
To achieve maximum sustainable value from all the activities of the organization
Enhances the understanding of the potential upside and downside of the factors that can affect an organization
Increases the probability of success and reduces both the probability of failure and the level of uncertainty associated with achieving the objectives of the organization
Types of risk
Systematic risk
Unsystematic risk
What are the systematic risk
Market related risk
Macro in nature
External in nature
Uncontrollable by an organization
What are the unsystematic risk
Company specific risk
Micro in nature
Internal in nature
Controllable by an organization
Arises due to variability in the interest rate from time to time
The volatility of bond prices that result from changes in interest rate
It particularly affects the debt securities as they carry the fixed rate of interest
Interest rate risk
Also known as position risk
Defined as the risk to which a broker dealer is exposed to and arising from securities held by its principal or in its proprietary or dealer account
Associated with consistent fluctuation seen in the trading price of any particular share or securities
Market risk
The risk that the value of your money in real terms will be less than the purchasing power of your original investment
Purchasing power risk or inflationary risk
Types of purchasing power risk or inflationary risk
Demand inflation risk
Cost Inflation risk
Kinds of risk in systematic risk
Interest rate risk
Market risk
Purchasing power risk or inflationary risk
Kinds of unsystematic risk
Business risk or liquidity risk
Financial risk or credit risk
Operational risk
Types of business risk or liquidity risk
Asset liquidity risk
Funding liquidity risk
Means that risk that an entity will be unable to unwind a position in a financial instrument at or a near its market value because of the lack of depth or disruption in the market for the instrument
Asset liquidity risk
Means the risk that an entity cannot obtain the necessary funds to meet its obligation as they failed due at normal times and during crisis
Funding liquidity risk
Types of financial risk or credit risk
Large exposure risk
Settlement risk
Counterparty risk
Reset an investment may not find our ready buyer or that it may have to be disposed at a substantial loss
Business risk or liquidity risk
Also known as default risk
This refers to the credit worthiness of the issuer and expected ability to pay interest and repay the principal
Financial risk or credit risk
Means risk to which a broker dealer is exposed whether by way o
Proportional large amount of exposure to particular counterparty
Proportionally large exposure to a single issuer or debt
Proportionally large exposure to a single equity security or single issuer group
Large exposure risk
Exist when counterparty does not deliver a security or its value in cash as per agreement of trade or business
Settlement risk
Means the risk of a counterparty defaulting and its financial obligation to a broker dealer
Counterparty risk
Exposure associated with commencing and remaining in the business arising separately from exposures covered by other risk requirements
It is the risk of loss resulting from the inadequate or field internal process people policies and system
Operational risk
Steps in a sound risk management process
Assess
Treat
Monitor
Assess
- Recognition and identification of risks
- Evaluating and ranking of risks
Treat
- Responding to significant risks
- Resourcing controls
- Reaction planning
Monitor
- Reporting and monitoring risk performance
- Reviewing the risk management framework
Risk assessment phase
Risk identification
Risk Analysis
Method of risk identification
Establishes the exposure of the organization to risk and uncertainty
Risk identification
Risk identification requires an intimate knowledge of the following
Organization
The market in which it operates
The legal social political and cultural environment in which it exist
An understanding of strategic and operational objectives
Activity assist the effective and efficient operation of the organization by identifying those risk that require attention by management
Risk analysis
The result of this risk can be used to produce a risk profile.
It provides a tool for prioritizing risk treatment efforts
Risk analysis
Methods of risk identification
Strength weaknesses opportunities threats analysis SWOT
FLOWCHARTS AND DEPENDENCY ANALYSIS
QUESTIONNAIRES AND CHECKLIST
WORKSHOPS AND BRAINSTORMING
INSPECTIONS AND AUDITS
Responding to significant risk
Avoid or accept
Transfer
Reduce/ control/ mitigation
Exploit
Types of risk associated with securities
Systematic risk
Systematic risk
Overall day to day on going risk that can be caused by a combination of factors including the economy interest rates.
Uncontrollable by an organization
Macro in nature
Systematic risk
Risk arises due to increase in prices which result from an excess of demand over supply
Demand inflation risk
Arises due to sustained increase in the prices of goods and services
Cost inflation risk
Is presented in ISO 31000 as the activity of selecting and implementing appropriate control measures to modify the risk
Risk treatment
Includes as its major element risk control or reduction but extends further to for example risk avoidance risk retention risk transfer and risk exploitation
Risk treatment
Any system of risk treatment should provide
Efficient and effective internal controls
Divest by exiting a market or geographic area or by selling liquidating or spinning of a product group
Eliminate at the source by designing and implementing internal preventive processes
Accept risk at its present level taking no further action
Reprise products or services by including a premium
Avoid or accept
Ensure through cost effective contract with independent, financially capable party under a well defined rest strategy
Hedge risk by entering into capital markets
Share risks or rewards of investing in your markets and products by entering into alliances or joint venture
Transfer
Control risk through internal processes or actions that reduces the likelihood of undesirable events occurring to an acceptable level
Reduce control mitigation
Expand business portfolio by investing in new industries and geographic areas
Redesign the company’s business model
Reorganized processes through restructuring vertical integration outsourcing and reengineering
Exploit
Monitoring and review ensures that the organization monitors risk performance and learns from experience
Risk monitoring phase
Monitoring and review as the final step involves understanding the impact of the control mechanism developed on the hazard and there is it possess
Risk monitoring phase
Methods of risk identification
Swot analysis
Flowcharts and dependency analysis
Questionnaires and checklist
Workshops and brainstorming
Inspections and audits
Strengths weaknesses opportunities threats
Swot analysis
Analysis of processes and operations within the organization to identify critical components that are key to success
Flowcharts and dependency analysis
Use of structured questionnaires and checklist to collect information to assist with the recognition of the significant risk
Questionnaires and checklist
Collection and sharing of ideas and discussion of the events that could impact the objectives stakeholder expectations or key dependencies
Workshops and brainstorming
Physical inspections of premises and activities and audits of compliance with established system and procedures
Inspections and audits
Can be used to produce a risk profile. It provides a tool for prioritizing risk treatment efforts.
The result of the risk analysis
Establishes the exposure of the organization to risk and uncertainty
Risk identification
