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MA4B
Risk Management
- systematic process of understanding, evaluating and addressing those risk to maximize
chances of objective individuals and communication sustainability.
- the forecasting and evaluation of financial risks together with identification of procedures
to avoid or minimize their impacts.
- is the process of making and carrying out decisions that will minimize the adverse effects
of risk on an organization.
Unsystematic Risk: Unsystematic risk is due to the influence of internal factors prevailing
within an organization. Such factors are normally controllable from an organization's point of
view.
Business Risk: Business risk is also known as liquidity risk. It is so, since it emanates
(originates) from the sale and purchase of securities affected by business cycles, technological
changes, etc.
Exchange Rate Risk: also called as exposure rate risk. It is a form of financial risk that arises
from a potential change seen in the exchange rate of one country's currency in relation to another
country's currency and vice-versa.
Recovery Rate Risk: often neglected aspect of a credit-risk analysis. The recovery rate is
normally needed to be evaluated.
Sovereign Risk: Sovereign risk is associated with the government. Here, a government is unable
to meet its loan obligations, reneging (to break a promise) on loans it guarantees, etc.
Settlement Risk: exists when counter party does not deliver a security or its value in cash as per
the agreement of trade or business.
Operational Risks: are business process risks failing due to human errors. This risk will change
from industry to industry. It occurs due to breakdowns in the internal procedures, people, policies
and systems.
Model Risk: is involved in using various models to value financial securities. It is due to
probability of loss resulting from the weaknesses in the financial-model used in assessing and
managing a risk.
People Risk: arises when people do not follow the organizations procedures, practices and/or
rules. That is, they deviate from their expected behavior.
Legal Risk: arises when parties are not lawfully competent to enter an agreement among
themselves. Furthermore, this relates to the regulatory-risk, where a transaction could conflict
with a government policy or particular legislation (law) might be amended in the future with
retrospective effect.
Political Risk: occurs due to changes in government policies. Such changes may have an
unfavorable impact on an investor. It is especially prevalent in the third-world countries.
Credit Risk or Default Risk: Credit risk is the risk that a company or individual will be unable
to pay the contractual interest or principal on its debt obligations.This type of risk is of particular
concern to investors who hold bonds in their portfolios.
Country risk: refers to the risk that a country wont be able to honor its financial
commitments.Country risk applies to stocks, bonds, mutual funds, options and futures that are
issued within a particular country.
Reputational Risk: loss of a companys reputation or community standing might result from
product failures, lawsuits or negative publicity. Reputations take time to build but can be lost in a
day.
Process Risk: risky business process that could lead to project failure.
Deals with the particular risks associated with the undertaking of a project.