Risk Management an Introduction

What is Risk:Risk is a concept linked to human expectations. It indicates a potential negative

effect on an asset that may derive from given processes in progress or given future
events. In the common language, risk is often used as a synonym of probability of a
loss or of a danger. In the assessment of professional risk, the concept of risk
combines the probability of event occurring with the impact that event may have and
with it various circumstances of happening.

Risk arises when there is a possibility of more than one outcome and the ultimate
outcome is unknown. Risk can be defined as the variability or volatility of
unexpected outcomes. It is usually measured by the standard deviation of historic
outcomes. All businesses face uncertainty. The objective of business is to maximize
profit and shareholder value-added mainly by managing risks.
There are different ways in which risks are classified. One way is to distinguish
between business risk and financial risks. Business risk arises from the nature of a
firms business. It relates to factors affecting the product market. The factors are as
follows Prices, Productivity, Market Share, Technology, and Competition etc.

Financial risk arises from possible losses in financial markets due to movements in
financial variables. It is usually associated with leverage with the risk that
obligations and liabilities cannot be met with current assets.

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Inability to fund assets or meet obligations at a

reasonable price

Risk can be explained as uncertainty and is usually associated with the

unpredictability of an investment performance. All investments are subject to risk,
but some have a greater degree of risk than others. Risk is often viewed as the
potential for an investment to decrease in value. Though quantitative analysis plays
a significant role, experience, market knowledge and judgment play a key role in
proper risk management. As complexity of financial products increase, so do the
sophistication of the risk managers tools.
Risk can be understood as a potential future loss. When Company takes an
insurance cover, what it is hedging is the uncertainty associated with the future
events. Financial risk can be easily stated as the potential for future cash flows
(returns) to deviate from expected cash flows (returns).
Risk management is the process of measuring risk and then developing and
implementing strategies to manage that risk. Financial risk management focuses on
risks that can be managed ("hedged") using traded financial instruments (typically
changes in commodity prices, interest rates, foreign exchange rates and stock
prices). Financial risk management will also play an important role in cash
management. This area is related to corporate finance in two ways. Firstly, firm
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exposure to business risk is a direct result of previous Investment and Financing

decisions. Secondly, both disciplines share the goal of creating, or enhancing, firm
value. All large corporations have risks management teams, and small firms
practice informal, if not formal, risk management.
Derivatives

are

the

instruments

most

commonly

used

in

Financial

risk

management. Because unique derivative contracts tend to be costly to create and

monitor, the most cost-effective financial risk management methods usually involve
derivatives that trade on well-established financial markets. These standard
derivative instruments include options, futures contracts, forward contracts, and
swaps.
The most important element of managing risk is keeping losses small, which is
already part of your trading plan. Never give in to fear or hope when it comes to
keeping losses small.
Risk can be explained as uncertainty and is usually associated with the
unpredictability of an investment performance. All investments are subject to risk,
but some have a greater degree of risk than others. Risk is often viewed as the
potential for an investment to decrease in value.

What is Risk Management?

Risk management is a discipline that enables people and organizations to cope with
uncertainty by taking steps to protect its vital assets and resources. But not all risks
are created equal. Risk management is not just about identifying risks; it is about
learning to weigh various risks and making decisions about which risks deserve
immediate attention.
Risk management is not a task to be completed and shelved. It is a process that, once
understood, should be integrated into all aspects of your organization's management.

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Risk management is an essential component in the successful management of any

project, whatever its size. It is a process that must start from the inception of the
project, and continue until the project is completed and its expected benefits realised.
Risk management is a process that is used throughout a project and its products' life
cycles. It is useable by all activities in a project. Risk management must be focused on
the areas of highest risk within the project, with continual monitoring of other areas of
the project to identify any new or changing risks.

Managing risk - How to manage risks

There are five ways of dealing with, or managing, each risk that business has
identified. One can i) Identify, ii) Asses, iii) Review or iv) Control v) Mitigate vi) Monitor.

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For example, Company X may decide to accept a risk because the cost of eliminating
it completely is too high. It might decide to transfer the risk, which is typically done
with insurance. Or It may be able to reduce the risk by introducing new safety
measures or eliminate it completely by changing the way it produce the product.
When one have evaluated and agreed on the actions and procedures to reduce the
risk, these measures need to be put in place.
Risk management is not a one-off exercise. Continuous monitoring and reviewing is
crucial for the success of its risk management approach. Such monitoring ensures
that risks have been correctly identified and assessed, and appropriate controls put in
place. It is also a way to learn from experience and make improvements in the risk
management approach. All of this can be formalised in a risk management policy,
setting out business' approach to and appetite for risk and its approach to risk
management. Risk management will be even more effective if corporate clearly assign
responsibility for it to chosen employees. It is also a good idea to get commitment to
risk management at the board level.
Contrary to conventional wisdom, risk management is not just a matter of running
through numbers. Though quantitative analysis plays a significant role, experience,
market knowledge and judgment play a key role in proper risk management. As
complexity of financial products increase, so do the sophistication of the risk
manager's tools.

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