Introduction to risk management

Chapter-05

What is risk?
In simple terms, a risk is the chance of something happening that will have a negative effect.The
possible variation in an outcome from what is expected to happen. The possibility that an event
will occur and adversely affect the achievement of objectives.
variation between outcome and expected happen
What is Opportunity?
The possibility that an event will occur and positively affects the achievement of objectives.

How far does risk affect a business achieving it objectives?

Risk affects adversely the achievement of objectives of an organization. Pure risk describes the
possibility that something will go wrong. Speculative risk describes the possibility that
something could go right than expected on which the business flourishes.

It is helpful for business to think about in the context of managing risk in achieving its objectives
Pure risk: posiibility to 100% damage there are 2 types personal pure risk, property pure risk.
speculative risk: can be controled,
What is uncertainty?
The inability to predict the outcome from an activity due to a lack of information. The possibility
that an event will occur and positively affects the achievement of objectives, Uncertainty is
sometimes turned into risk by the use of subjective probabilities.
ÿ ÿ ÿ predict

What is the difference between risk and uncertainty?

Risk is a quantification of the potential variability in a value based on past data. Uncertainty on
the other hand, is non-quantifiable. Uncertainty is sometimes turned into risk by the use of
subjective probabilities.

Risk Uncertainty
The possible variation in the outcome from The inability to predict the outcome from an
what is expected to happen activity due to the lack of information.
Risk can be expressed in term of probability Uncertainty cannot be expressed in term of
probability
Risk can be minimized or removed Uncertainty cannot be removed
In case of risk, information is available In case of uncertainty, information is not
available.
Risk can be quantified Uncertainty cannot be quantified

Mohammad Moniruzzaman FCA, FSIB PLC

What are the risks generally faced by business?
1. Risk that trade condition might be poor for example sales fall, cost increase etc.
2. Risk of inadequate control that may result in through inefficiency
3. Risk of financial nature i.e. the way in which the business is financed

What is upside and downside risk?

Upside risk:

The risk that something will go right is called upside risk. For example, Budgeted profit is 10
crore, actual profit is 12 crore.

Downside risk:

The risk that something will go wrong is called downside risk. For example, Budgeted profit is
10 crore, actual profit is 8 crore.

What are various types of financial risk?

Financial risk:

1. Credit risk: Credit risk is the risk that the customers are not going to pay.
2. Market risk: Market risk is the risk of losing the markets.
3. Liquidity risk: Liquidity risk is the risk of unexpected shortage of cash.
4. Default risk: It is the risk that debtor will not pay.
5. Foreign exchange risk: It is the risk due to the changes in the foreign exchange rate.

What are various types of operational risk?

Operational risk:

It is the risk of direct or indirect losses arising from inadequate internal processes, people and
systems.

1. Process risk: It is the risk that business processes may be ineffective.

2. People risk: It is the risk of insufficient staff in the organization
3. Systems risk: It is the risk that arises from the information and communication systems
such as systems capacity, data availability, or data integrity.
4. Legal risk: It is the risk of loss for the fact that contract cannot be legally enforced.
5. Event risk: It is the risk of any event that may have serious far-reaching impact on the
business risk happend for any type of events.

What is risk management? How to manage the risk?

Risk management: Risk management is a process of identification, analysis and economic
control of risk that may threaten the assets or earning capacity of a business.

Mohammad Moniruzzaman FCA, FSIB PLC

The purpose of risk management:

1. To minimize cost effectively the business’s exposure to risk ;

2. To reduce the probability of risk occurring in the first place and then if they do occur
3. To limit the impact they will have on business

How the risk is measured?

Risk is measured in term of exposure, volatility, impact and probability.

1. Exposure: It relates to nature of the organization. Some organization by nature is more

prone to risk exposure. For example aircraft, the chance of being injured in a fashion
industry, the risk of obsolescence.
2. Volatility: How is the factor to which the organization is exposed volatile?
3. Impact: It measures the amount of loss if the undesired event occurs?
4. Probability: It is how likely a particular event is going to happen?

When is risk management necessary?

1. When there is legal requirement; you are required by law to insure your car
2. When there is licensing or regulatory requirement
3. Listed Banking Company to follow risk based management approach as a requirement of
Bangladesh Bank.
4. Listed company in Bangladesh has to comply with BSEC Act.

What are the risks management processes?

1. Risk identification: Risk is identified through brain storming or using the past
experience to determine the risk exposure.
2. Risk analysis: It is assessment and measurement of risk. It considers how volatile the
factors is, what probability an event has.
3. Response and economic control: Risk can be avoided, reduced, shared or simply
accepted.
4. Monitoring and reporting: It is continuous process that if a risky event occurs then the
action is to immediate review of risk management. So it is a form of control.

What are the possible responses to risk?

1. Risk avoidance: Risk can be avoided by not doing the risky activities. This may not be
an option; first we should consider do we need to do risky activity at all?
2. Risk Reduction: Risk can be reduced doing the activity and minimizing the probability
of the event and the impact it has is as small as possible by monitoring the market and
environmental phenomenon.
3. Risk Sharing: Risk can be shared by transferring it to hedge and insurance.
4. Risk Acceptance: If the other option is not viable, risk can simply be accepted

Question ÿ ÿ ÿ ÿ ÿ ÿ
expected return. ÿ
important ÿ
Mohammad Moniruzzaman FCA, FSIB PLC
What are the purposes of risk management?
1. To minimize cost effectively the business’s exposure to risk
2. To minimize the probability of risk
3. To minimize the impact they have on the business

Crisis: An unexpected event that threatens the wellbeing of the business, disrupts the operation
of the business that affects customers, suppliers, employees and other stakeholders is
called crisis.

Define crisis management. What are different types of business crisis?

Crisis management is a process of identifying a crisis, planning a response to the crisis,
confronting and resolving a crisis. For example, natural disaster and terrorism have been seen to
have an extreme effect in the context of global trade.

Types of business crisis:

1. Financial crisis: Short term liquidity, cash flow problem and long term solvency
problem.
2. Public relation crisis: Negative publicity that could adversely affect the success of
business.
3. Strategic crisis: Changes in the business environment that call the viability of the
business into question. For example, Technology makes the product old and obsolete.
4. Industry crisis: Strike, break up of major supplier
5. Business crisis: Takeover, death of key personnel

How to address the crisis?

Crisis happens when the risk come to a reality.

a) Crisis prevention:

Business should prevent crisis by

1. Planning ahead
2. Projecting the likely outcome
3. Avoiding the decision having the potential to turn into crisis.

b) Contingency planning:

Business should make a contingency plan for the worst and/or most likely to occur and
staff to be trained up accordingly of how to implement it in the event of a crisis.

c) Effective action in the event of crisis:

1. Assess objectively the cause of crisis
2. Determine whether the cause has a long term or short term effect
Mohammad Moniruzzaman FCA, FSIB PLC
 3. Project the most likely course of actions
4. Focus on activity that will mitigate the impact
5. Look for opportunity.

What should be the course of action in the event of public relation crisis?
1. To prevent or counter spread of negative information
2. To use media to counter the arguments

Disaster:
The business operation, or significant part of business operation break down for some reasons
leading potential loss of equipment, data and fund.

What is disaster recovery plan? What are the contents of disaster recovery
plan?
Disaster recovery plan: Any systems that have suffered a disaster must recover as soon as
possible so that further losses are not incurred.

 Standby procedure: Some procedures are performed while normal service is disrupted
 Recovery procedures: The causes of breakdown has been identified and corrected
 Personnel management: To ensure that the above are implemented properly.

The contents of disaster recovery plan:

 Definition of responsibility: Each with defined responsibility

 Priority: Important tasks are prioritized
 Communication with the employees
 Public relation

What are the responses and controls based on sharing or reduction of

disaster?

 Fire can be countered by fire Extinguishers and training to the staff of what to do on the
occurrence of fire
 Flooding can be countered by water proof ceiling and floors
 Threat from terror can be countered by physical access control
 IT collapse can be countered by recovery systems and backup plan.

How to calculate the expected return?

Expected return is the weighted average return, probability being the weight under different
scenarios.

Mohammad Moniruzzaman FCA, FSIB PLC

What are the risks for the investors?
1. Risk for the lender: risk of insolvency whether the money invested will be recovered
with interest.
2. Risk of shareholders:
a) Risk of no dividend
b) Risk of low dividend
c) Risk of fall in share price
d) Volatility of return

What do you mean by risk appetite?

The extent to which the business is prepared to take the risk to achieve the objectives is risk
appetite.

What is the approach of risk appetite?

1. To decide what the business wants to achieve
2. To decide what the business’s risk appetite
3. To find strategies to achieve the objectives that does not involve risk more than the
business is willing to accept.

What are the attitudes towards risk?

1. Risk averse
 Investors want to avoid risk
 Investors are satisfied with lower secured return
2. Risk neutral: Investors try to take risk as per the expected return.
3. Risk seeking: Investors will take higher risk to achieve higher return.

Thanks

Mohammad Moniruzzaman FCA, FSIB PLC