Project risk management

Question 1

What are the two determinants of risk?

Answer 1

• Operating risk

- Financial risk

Question 2

What is operating risk?

Answer 2

Volatility results driven by the company’s operational structure. It is measured by operating leverage

Question 3

How is operating risk measured?

Answer 3

By operating leverage = CM/EBIT

Question 4

What is financial risk?

Answer 4

It is driven by the company's financial structure measured by financial leverage: EBIT/NI
It has 3 components: 
1- Credit risk (leverage effect)
2- Interest rate risk
3- Currency risk

Question 5

What are the three components of financial risk?

Answer 5

1- Credit risk (leverage effect)
2- Interest rate risk
3- Currency risk

Question 6

For what types of scenario is NPV used?

Answer 6

For stable ones with high performance stability since the discount rate is constant

Question 7

What are the approaches for risk assessment are used for certain scenarios?

Answer 7

• NPV, IRR and adjusted approaches

Question 8

What are the approaches for risk assessment are used for uncertain scenarios?

Answer 8

• Statistics, probability (decision tree and montecarlo), real options

Question 9

What is the Montecarlo approach?

Answer 9

Simulation of statistical approach in which each combination results on an unique NPV

Question 10

What is the decision tree?

Answer 10

It is recommended in complex projects in which decisions are taken in sequence and are interdependent:

• Different phases
• Uncertain flows
• Implementation is conditioned by external trends