Risk Management Frameworks

Question 1

What are stakeholders?

Answer 1

Individuals and companies whose utility depends on how well a firm is doing but who CANNOT diversify the impact of firm risks on their individual situation. Example: suppliers, workers, customers.

Question 2

What are shareholders?

Answer 2

Owners of a firm–they want the firm to be managed in a way that maximizes their welfare.

Question 3

What is a “Default Put Option”?

Answer 3

Option made available to shareholders if facing insolvency, since their value cannot become negative.

Question 4

What is assest substitution problem?

Answer 4

Investment in projects with negative net value but with a high return if they are successful; if it fails and significant losses occur, a major share is borne by the bondholders.

Question 5

What is Risk Management and it’s instruments?

Answer 5

The approach to dealing with pure risk by anticipating possible losses and designing and implementing procedures that minimize the occurrence of loss or the financial impact of the losses that do occur.

Tools of Risk Control: avoidance and reduction

Risk Financing: Risk retention (active or passive), Risk transfer

Question 6

What is ERM?

Answer 6

Enterprise Risk Management, bringing together all the management of risks into a single portfolio, managing speculative and pure risks simultaneously.

Question 7

What is the ERM Framework?

Answer 7

1) strategic, operations, reporting, compliance

Question 8

What is the Sarbanes-Oxley Act?

Answer 8

Law that extends long-standing requirement for public companies to maintain systems of internal controls.

Question 9

What is the implementation plan with the risk management process?

Answer 9

1) Determination of objectives
2) Identify all significant risks
3) Evaluate potential frequency
4) Develop and select methods of risk management
5) Implementing those methods
6) monitoring performance and suitability of ERM methods / strategies