RISK AND ITS MANAGEMENT

(A CASE STUDY APPROACH)

Risk
Variety of Meaning
Uncertainty

Future is highly uncertain as we do not know

what will happen tomorrow

Mr. X invested BDT 50,000 in the Capital Market of Bangladesh (DSE)

through buying shares of different listed companies. As capital market is
too much volatile in the case price changes. Mr. X has the equal chance of
gaining or losing his investment with any amount.
Mr. X can also use BDT 50,000 for buying an luxurious bi-cycle for his
personal transportation purpose. But in his resident area stealing of
vehicles from garage occurring regularly for last few months. So, there is
a chance of being stolen his bi-cycle or remain safe in the garage.

Speculative
Risk

Pure Risk

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Grater Risk Grater Cost

Pabna Plant
Worth: BDT 200 Cr.

Dhaka Plant
Worth: BDT 300 Cr.

SQUARE Pharmaceuticals Limited has two different production plants situated at

Pabna and Dhakai respectively. The wealth value of Dhaka Plant is grater than
Pabna Plant. It is also notable Pabna has more chance of rainingii over the year of
2016 as on weather forecast than Dhaka which is unfavorable for
Pharmaceuticals Production.
i. Expected
Loss

ii. Uncertainty

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Direct Versus Indirect Loss

Last year, SQUARE Pharmaceuticals Limited, Pabna Plants one production
unit became unworkable due to severe damage of maximum equipment due
to short-circuit of electricity system which cost BDT 5 Cr.i
After trying to make the damaged unit workable again through maintenanceii
for 15 days the production unit declared abandoned. To make the whole
production system running SQUARE took immediate loan of BDT 7 Cr.iii
from Bank Asia Limited at 7% interest. During the maintenance period
SQUARE produced 10,000 units less than the regular production worth
revenue of BDT 10,00,000iv and provided regular payments to suppliers for
previous raw materials and permanent employees although they were not
working for full time which cost BDT 2,00,000v.

iii. Higher Cost of Funds and

Foregone Investment

i. Direct
Loss

ii. Indirect
Loss

iv. Loss of Normal Profit

v. Extra Operating Expenses

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SQUARE Pharmaceuticals Limited is the market leader in the

Pharmaceuticals Industry of Bangladesh since 1985 and sells his
pharmaceuticals product all around the world. The net turnover of
SQUARE is BDT 26,213 million and export is BDT 1,138 million in
2014-15. If SQUARE demands BDT 1 more for per unit of product
it sells, SQUARE can earn BDT 1 million more and vice versai. On
the other hand if SQUAREs lobour costs or raw materials increased
by BDT 1 per unit it utilized, SQUARE will lose BDT 1 million and
vice versaii.

Current

Changes

1 = BDT 78

1 = BDT 80

Loan Interest Rate

7%

Loan Interest Rate

6%

Changed Value
Export Value will go up by BDT
25 million and vice versa
Cost of Capital will decrease by
1% and vice versa

i. Output
Price Risk
ii. Input

Cause
Exchange Rate Risk
Interest Rate Risk

Created & Presented by Hossain Raju

One of the DEBTORS of SQUARE Pharmaceuticals Limited, Lazz

Pharmacy, Largest Medicine Store recently faced huge loss due to
fire incident in his warehousei & ii and fined by Govt. Regulatory
Authorityiii due to illegal medicine selling activities. Thats why Lazz
Pharmacy failed to pay the duesiv to SQUARE on time and in a
situation of bankruptcy.

Pure Risk

i. Damage to Assets

ii. Worker Injury

iii. Legal Liability

iv. Credit Risk

Created & Presented by Hossain Raju

Created & Presented by Hossain Raju

Personal Risks
Fire incident in Lazz Pharmacy causes some employees to;
Outcome

Cause

Death of one, Disability of three, Unemployment of some

Earnings Risks

Injured employees faced large hospital charges

Medical Expense Risk

Some become failure to pay their home and auto loans

Liability Risk

Some other risks also may appear to a persons life;

Outcome

Cause

Lost, damaged or stolen of automobiles, homes, boats

and computers

Physical Asset Risk

Inflation and Changes in values of stocks and bonds

Financial Asset Risk

Outlive of financial resources after retirement

Longevity Risk

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Risk Management Process

Identify all significant of risks

Evaluate the potential frequency and severity of losses

Develop and select methods for managing risk

Implement the risk management methods chosen

Monitor the performance and suitability of the risk management

methods and strategies on an ongoing basis
Created & Presented by Hossain Raju

Risk Management Methods

SQUARE Pharmaceuticals Limited
regularly checks their equipmenti
used in the Dhaka and Pabna
Production Plant by an internal
group of experts on 15days interval
basis and their both Plants are
equipped
with
heat-or-smoke
activated sprinkler systemsii in
order to maintain the Fire Safety.
Loss Control

SQUARE Pharmaceuticals Limited

holds BDT 5 millioniii in their
funds in order to meet up any
emergency need may cause by any
undesired
damage
or
loss.
SQUARE also has a contract with
Pioneer Insurance Ltd. and Pragati
Insurance Ltd.iv Under Group
Insurance SQUARE maintain its
employee benefits in the long term.
Loss Financing

i. Loss Prevention

iii. Retention and Self Ins.

ii. Loss Reduction

iv. Insurance
Created & Presented by Hossain Raju

Risk Management Methods (cont)

As SQUARE involves in
foreign export of its goods and
import of raw materials,
SQUARE has a banking
relationship with Commercial
Bank of Ceylon Ltd., City Bank
N.A., HSBC and Standard
Chartered Bank Ltd. for smooth
foreign trade operation. These
banks have market leading
foreign trade all around the
world.
Loss Financing

Along with Pharmaceuticals

business, SQUARE
Pharmaceuticals has SQUARE
Formulation Limited as subsidiary,
SQUARE Textiles, Fashions and
Hospitals Ltd. as subsidiariesi.
SQUARE also has a portfolio of
36 securities in the capital market
which has been managed by a
portfolio manager leaded by Mr.
Md. Kabir Reza, FCMA.ii
Internal Risk Reduction
i. Diversification

Hedging and Others

ii. Investment in Information

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Cost of Risk
Formulation and Implementation of Risk Management
Methods require cost. Nothing is free in this world. The cost
incurred for the methods initiated or taken as risk
management is the cost of risk. Along with the methods there
is another type of cost.

ex ante

ex post

Created & Presented by Hossain Raju

Components of Cost of Risk

After the Fire Incident in the Pabna Plant
of SQUARE Pharmaceuticals, a number
of irrational small investors think
SQUARE will a face a big loss and they
sell their shares of SQUARE and spread a
rumor which causes decline of BDT 2 of
the overall per sharei price in the capital
market. The rumor also spreads that one
of the SQUARE products named Ace XR
is detrimental for health which cause
overall reduction of 2% saleii of SQUARE
medicine products in the local market

Cost of Residual
Uncertainty

i. Effects on Shareholders

ii. Effects on Stakeholders

1
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Cost Trade Off

Loss Control Methods:
Direct and Indirect Cost
Loss Financing and Internal Risk Reduction Methods:
Indirect Cost
Residual Uncertainty:
Loss Financing and Internal Risk Reduction Methods

Created & Presented by Hossain Raju

Thank You All