Risk Managment C4

Question 1

Risk management strategy

Answer 1

1. Is the responsibility of the senior manager
2. Risk committee can be formed
3. Must address risk and match risk profile of the firm
4. Risk and uncertainty is inevitable

Question 2

Risk appetite

Answer 2

The amount and nature of exposures to risk that an entity is prepared to accept in order to achieve its strategic and operational goals

Question 3

Risk capacity

Answer 3

The maximum risk that an organisation is willing to take

Question 4

Risk policy

Answer 4

1. Risk appetite statement should be issued to guide people
2. Risk control measures
   Quantitative targets with ceiling should be issued

Question 5

Risk management process

Answer 5

1. Identify risk
2. Analyse risks
3. Prepare approach
4. Execute approach
5. Review and monitor

Question 6

Risk manager

Answer 6

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

Question 7

Factors on which risk manager specific task will depend on

Answer 7

1. How specialised the role is
2. Seniority of the role
3. Industry

Question 8

Activities of risk manager

Answer 8

1. Risk assessment
2. Risk evaluation
3. Planning, designing, implementing risk management process
4. Establishing, quantifying risk appetite
5. Providing training on risk awareness

Question 9

Risk register

Answer 9

Important part of internal control processing
Contains a list of major risk which helps directors understand the risk profile of the organisation

Question 10

Risk profile record the following

Answer 10

1. Description of each risk
2. Interdependence with other ridk
3. Quantification
4. Date the risk was taken
5. Plan on how to deal with the risk
6. Controls to reduce the risk

Question 11

Strategic riskm

Answer 11

Risk that an entity is unable to achieve one or more strategic goals
Affects ability to succeed or survive
Top down approach required

Question 12

Operational risk

Answer 12

Risk of loss resulting from failure or inadequate process, people, systemw
Affects day to day activities
Eg: loss of key supplier

Question 13

Credit risk

Answer 13

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

Question 14

Sector/ industry risk

Answer 14

Affects only particular industry
Legal compliance risk vary based on industries
Eg. non performance assets in banking

Question 15

Market / systematic risk

Answer 15

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

Question 16

Liquidity risk

Answer 16

Difficulty in meeting obligations related to liability
Failure to raise cash
Leads to premature sale of assets at loss

Question 17

Technological risk

Answer 17

The risk that a firm doesnot capitalise the potential of technology to maintain or gain competitive advantage

Question 18

Legal and regulatory risk/ compliance risk

Answer 18

Risk of breaching applicable laws and regulations

Question 19

Health and safety risk

Answer 19

Risk of unintentional harm to employees, other individuals caused by firm
Specific legislation may apply
Result in civil as well as criminal proceeding

Question 20

Sustainability/ environmental risk

Answer 20

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

Question 21

Climate related risk

Answer 21

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

Question 22

Reputation risk

Answer 22

Companys reputation will decline if it fall short of expectations
Negative publicity
Happens due to action, practices of stakeholders

Question 23

Derivative risk

Answer 23

Risk that derivative will cause substantial financial damage to the company
Financial risk
Futures and options

Question 24

Risk assessment

Answer 24

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

Question 25

Impact/ consequences mapping

Answer 25

Likelihood
Impact

Question 26

Dynamic nature of risk

Answer 26

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

Question 27

TARA approach

Answer 27

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

Question 28

Risk committee

Answer 28

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