Risk Management Flashcards
What is risk?
A situation/possibility involving exposure to danger/harm or loss
Name 6 risk categories
- Fundamental risk
- Particular risk
- Speculative risk
- Pure risk
- Strategic risk
- Operational risk
Define fundamental risk
Risk that affect broader groups of people & are beyond the control of a single individual
Define particular risk
These are risks over which an individual does have a measure of control
Define speculative risk
These risks are symmetric, which means that the event can have either a positive/negative effect on an individual/enterprise
Define pure risk
These risks only have a negative effect on an individual/entity & there is no upside/positive outcome that may materialise
Define strategic risk
It is an uncertain event/circumstance that can affect an entity at a strategic level.
These risks originate in the external environment
And are usually associated with events/circumstances that can impede an entity from achieving it’s business & financial strategies & objectives.
Define operational risk
Relates to the entity’s potential owing to failures in it’s internal business & control processes.
These are risks related to the entity internal resources, systems, process & personel.
What is systematic risk?
Risk inherent to the market as a whole, also known as market risk.
The risk may not be linked to a specific industry but the market as a whole
And it’s not possible to completely avoid the risk as it is not within the control of the entity
What is unsystematic risk?
Risk that is specific to the entity/ industry
What is business risk?
The risk that the company will not be able to be sustainable & profitable long-term,
This is an overall risk that includes variety of elements affecting the entity’s revenue & expenses
What is financial risk?
Risk that the company will not be able to meet its debt obligations as they fall due. E.g Interest rates
Name the steps in the risk management process
Identify the risk
Evaluate & assess the risk
Design appropriate controls to respond to risk
Post implementation monitoring and control
Name & explain 4 ways to deal with risks
- Accepting the risk- Impact is not severe
- Control/manage the risk- Lower risk by implementing procedures
- Transfer of risk- Transfer risk to 3rd party(cost vs benefit)
- Abandon/avoid risk- Likelihood very high & impact so severe that management abandon/avoid the risk
What is financial innovation?
It is incorporating strategies into your business business model to minimize risk while maximizing returns from the finance point of view
Give reasons for financial innovation
Legislation
Interest rate volatility
Volatility of prices
Academic work
Accounting reasons
Technological advances
Tax asymmetries
Transaction costs
Agency cost
Risk hedging
Increasing the assets liquidity
What are options?
They are financial derivatives that give buyers the right, but the not the obligation, to buy or sell an underlying asset at an agreed-upon price and date
What is a call option?
Option to buy a certain commodity/goods at a certain price & at agreed price (The buyer is not obligated to exercise the option)
What is a put option?
Option to sell a certain commodity/goods at a certain price & at agreed price (The owner is not obligated to exercise the option)
What are futures/forward contracts?
Similar to options, the only difference is that the buyer/seller has no choice on the exercise date but to go through with the transaction.
What are interest rate swaps?
A forward contract to swap one interest rate usually fixed for another or vice versa
