electives quiz 2

• Risk


  The combination of the probability of an event and its consequences
• Risk


  The perceived extent of possible loss
• Peter Drucker: 'Uncertainty cannot be entirely eliminated and wherever there is uncertainty there is risk'
• Sources of Risk

  • Uncertainty in financial markets
  • Project failures
  • Legal liabilities
  • Credit risk
  • Accidents
  • Natural causes and disasters
  • Deliberate attacks from an adversary
• Business Risk


  A condition involving exposure to events that would have an adverse impact on a company's objective
• Business Risk


  A combination of the likelihood of an event occurring and the magnitude of its consequences
• Cost of Risk

  • Outlays to reduce risks
  • The opportunity cost of activities forgone due to risk considerations
  • Expenses of strategies to finance potential losses
  • The cost of reimbursed losses
• Business Risk Portfolio


  The full range of risks faced by today's companies that have potential to affect the triple bottom line
• Scope of Business Risk

  • Strategic Risk
  • Financial Risk
  • Operational Risk
  • Commercial Risk
  • Technical Risk
• Strategic Risk


  The risk of planning failure, including poor marketing strategy, poor acquisition strategy, unexpected changes in consumer behavior, political and regulatory change
• Financial Risk


  The risk of failure of financial control, including treasury operations, lack of counterparty and credit assessment, fraud and its control, systematic failure, poor receivables and inventory management
• Operational Risk


  The risk of human actions, either willful or by omission, including system mistakes, unsafe practices, willful destruction
• Commercial Risk


  The risk of business interruption, including loss of key personnel, supplier failure, legal issues and compliance
• Technical Risk


  The risk of failure of physical assets, including equipment failure, infrastructure breakdown, fire and physical impact, explosion and/or sabotage, pollution, natural events
• Types of Risk

  • Pure Risk
  • Speculative Risk
• Pure Risk


  Exists when there is uncertainty as to whether loss will occur, with no possibility of gain - only potential for loss
• Pure Risk


  • Uncertainty of damage to property by fire or flood or the premature death caused by accident or illness
• Speculative Risk


  Exists when there is uncertainty about an event that could produce either a profit or loss
• Speculative Risk


  • Business ventures and gambling transactions
• Static Risk


  Stems from an unchanging society in stable equilibrium
• Static Risk


  • Uncertainties due to such random events as lightning, windstorms and death. Business undertakings in a stable economy
• Dynamic Risk


  Produced because of changes in a society, can be either pure or speculative
• Dynamic Risk


  • Urban unrest, increasingly complex technology and changing attitudes of legislatures and courts about a variety of issues
• Dynamic and static risks are independent; greater dynamic risks may increase some types of static risks
• Dynamic and Static Risk Interaction


  • Environmental pollution caused by increased industrialization may be affecting global weather patterns
• Subjective Risk


  The mental state of an individual who experiences doubt or worry as to the outcome of a given event
• Objective Risk


  More precisely observable and therefore measurable, the probable variation of actual from expected experience
• Why Manage Risks

  • Cost of sanctions
  • Civil claims
  • Legal cost
  • Statutory and common-law cleanup obligations
  • Natural resources damages claims
  • Direct lender liability
  • Adverse publicity
  • Loss of staff morale
  • Increased insurance premiums
  • Increased establishment costs
  • Increased financing costs
  • Future liability to provide indemnification agreements and warranties
  • Revocation of regulatory licenses and permits
• Risk Management Process


  1. Define the context and risk management criteria

  2. Identify the risks

  3. Assess the significance of those risks

  4. Identify, select, and implement risk treatment options

  5. Perform monitoring, review, and corrective actions
• Risk Identification


  Involves identification of risk events, estimation of likelihood of occurrence, and description of the consequences
• Risk Analysis


  The systematic process to determine how often events may occur and the magnitude of the likely consequences
• Risk Evaluation


  The process to determine risk management priorities by comparing the level of risk against predetermined standards, target risk levels, or other criteria
• Risk Treatment Options

  • Risk Transfer or Sharing (e.g. Insurance)
  • Risk Reduction (e.g. detection systems, engineering works)
  • Risk Acceptance (where the business is prepared for the consequence)
• Risk identification process


  1. Identification of risks events

  2. Estimation of likelihood of occurrence

  3. Description of the consequences
• Categories of risk treatment options

  • Risk Transfer or sharing (e.g. Insurance)
  • Risk Reduction (e.g. detection systems, engineering works)
  • Risk acceptance (where the business is prepared for the consequence)
• Risk management process

  1. Risk Assessment

  2. Risk Evaluation

  3. Risk reporting

  4. Risk Treatment

  5. Monitoring
• Risk management


  • Provides for an organization that enables future activity to take place in a consistent and controlled manner
  • Improves decision making, planning and prioritization
  • Contributes to more efficient use/allocation of capital and resources
  • Reduces volatility in the non essential areas of the business
• Risk assessment


  The overall process of risk analysis and risk evaluation
• Risk identification


  1. Sets out to identify an organization's exposure to uncertainty

  2. Should be approached in methodical way to ensure all significant activities have been identified
• Methods of risk identification

  • Loss exposure Checklist
  • Financial Statement Analysis
  • Flowcharts
  • Contract Analysis
  • On-site Inspection
  • Statistical Analysis