Risk Managment C4 Flashcards
Risk management strategy
- Is the responsibility of the senior manager
- Risk committee can be formed
- Must address risk and match risk profile of the firm
- Risk and uncertainty is inevitable
Risk appetite
The amount and nature of exposures to risk that an entity is prepared to accept in order to achieve its strategic and operational goals
Risk capacity
The maximum risk that an organisation is willing to take
Risk policy
- Risk appetite statement should be issued to guide people
- Risk control measures
Quantitative targets with ceiling should be issued
Risk management process
- Identify risk
- Analyse risks
- Prepare approach
- Execute approach
- Review and monitor
Risk manager
Advices on any potential risk to overall profitability or existence of company
Responsible for managing the risk of the organisation, its employees, customers, assets, interests of stakeholders
Factors on which risk manager specific task will depend on
- How specialised the role is
- Seniority of the role
- Industry
Activities of risk manager
- Risk assessment
- Risk evaluation
- Planning, designing, implementing risk management process
- Establishing, quantifying risk appetite
- Providing training on risk awareness
Risk register
Important part of internal control processing
Contains a list of major risk which helps directors understand the risk profile of the organisation
Risk profile record the following
- Description of each risk
- Interdependence with other ridk
- Quantification
- Date the risk was taken
- Plan on how to deal with the risk
- Controls to reduce the risk
Strategic riskm
Risk that an entity is unable to achieve one or more strategic goals
Affects ability to succeed or survive
Top down approach required
Operational risk
Risk of loss resulting from failure or inadequate process, people, systemw
Affects day to day activities
Eg: loss of key supplier
Credit risk
Risk that involved failure of payment on timely basis by customers ultimately affecting firm’s debt
Will have adverse effect on firm’s credit rating
Sector/ industry risk
Affects only particular industry
Legal compliance risk vary based on industries
Eg. non performance assets in banking
Market / systematic risk
The exposure to uncertain market value of an asset, liability, derivatives
Depends on market factors
Can lead to equity risk, interest rate risk, currency risk, commodity risk
Liquidity risk
Difficulty in meeting obligations related to liability
Failure to raise cash
Leads to premature sale of assets at loss
Technological risk
The risk that a firm doesnot capitalise the potential of technology to maintain or gain competitive advantage
Legal and regulatory risk/ compliance risk
Risk of breaching applicable laws and regulations
Health and safety risk
Risk of unintentional harm to employees, other individuals caused by firm
Specific legislation may apply
Result in civil as well as criminal proceeding
Sustainability/ environmental risk
Concerns the damage an entity’s actions can cause to the environment and people
Can lead to loss of quality of life due to environmental degradation
Climate related risk
Risk related to climate change
Financial risk to global economy
Transition risk in transitioning to low carbon economy
Physical risk about the impacts to health about climate change
Reputation risk
Companys reputation will decline if it fall short of expectations
Negative publicity
Happens due to action, practices of stakeholders
Derivative risk
Risk that derivative will cause substantial financial damage to the company
Financial risk
Futures and options
Risk assessment
Allows entity to consider the effect (severity, consequences, probability) that each event has on achieving objectives and its likelihood
Eg: benchmarking, probabilistic and non probabilistic modeling
Impact/ consequences mapping
Likelihood
Impact
Dynamic nature of risk
The risk that firm faces changes according to size, nature, industry of the firm
1. Risk is not static
2. Risk management is a continuous process
3. Risk will change as operative env change
TARA approach
T= transfer:
Reducing risk by transferring
Eg: hedging, insurance, joint ventures, risk sharing arrangement with 3rd parties
A: avoid:
Do not do it
If in it, EXIT
Price services appropriately to reduce risk
R= reduce:
Control risk and reduce it to company’s threshold
Internal control processes
Modify business activities to reduce risk
A= accept
No action is taken
Accept the risk at present level
Risk committee
Sub committee of NED
Monitor risk management of board
Continuously evaluates work done by risk manager
Check if the decisions are consistent with risk policy of business
Constructively challenge decision related to risk manager
