RISK MANAGEMENT

SUBMITTED BY: subtitle style Click to edit Master GARIMA MAHAWER MBA 1st YEAR SECTION B
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What do you mean by Risk?

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Risk is the chance of future loss that can be foreseen

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Risk Management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary

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Principals of Risk Management

create value be an integral part of organizational processes be part of decision making explicitly address uncertainty be systematic and structured be based on the best available information be tailored take into account human factors

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Process of Risk Management

Establishing the context:

Identification Planning Mapping out Defining a framewrk Developing an analysis Mitigation or Solution

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Identification:

After establishing the context, the next step in the process of managing risk is to identify potential risks Source analysis: Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport. Problem analysis: Risks are related to identify threats. For example: the threat of losing money, the threat of abuse of privacy information or the threat of accidents

Common risk identification methods

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Objectives-based risk identification Scenario-based risk identification Taxonomy-based risk identification Common-risk checking Risk charting

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Assessment:

Assessed as to their potential severity of loss and to the probability of occurrence. The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical information is not available on all kinds of past incidents.

The most widely accepted formula for risk quantification is:

Rate of occurrence impact of the event = Risk

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COMPOSITE RISK INDEX

The above formula can also be re-written in terms of a Composite Risk Index, as follows:

Composite Risk Index = Impact of Risk event x Probability of Occurrence

The impact of the risk event is assessed on a scale of 0 to 5, where 0 and 5 represent the minimum and maximum possible impact of an occurrence of a risk. The probability of occurrence is likewise assessed on a scale from 0 to 5, where 0 represents a zero probability of the risk event actually occurring while 5 represents a 100% probability of

RISK OPTIONS

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Risk mitigation measures are usually formulated according to one or more of the following major risk options, which are:

4/26/12 POTENTIAL RISK TREATMENTS

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories:

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RISK AVOIDANCE
This includes not performing an activity that could carry risk. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed.

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RISK REDUCTION
Risk reduction or "optimization" involves reducing the
severity of the loss or the likelihood of the loss from occurring.

Optimizing risks means finding a balance between negative risk and the benefit of the operation or activity; and between risk reduction and effort applied.

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RISK SHARING
Briefly defined as "sharing with another party the burden of loss or the benefit of gain, from a risk, and the measures to reduce a risk."

The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you can transfer a risk to a third party through insurance or outsourcing.

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RISK RETENTION
Involves accepting the loss, or benefit of gain, from a risk when it occurs

Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained.

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RISK MANAGEMENT IN CORPORATE

This includes risks of non-financial corporations, but also those of business lines of financial institutions that are not engaged in trading or investment management. Risks vary from one corporation to the next, depending on such factors as size, industry, diversity of business lines, sources of capital, etc. Practices that are appropriate for one corporation are inappropriate for another. For this reason, corporate risk management is a more elusive notion than is financial risk

RISK MANAGEMENT EFFECTIVENESS

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An effective risk management process in organizations should be a step by step process starting with developing an understanding i.e. the objective of the process in the question. Following it should be the process of risk management to evaluate what can go wrong at each step of the process. And thereby identify and access controls for overcoming significant risk.

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Effective corporate risk management begins with an equity cushion in the capital structure. This helps to avoid raising prohibitively expensive capital following an adverse event. Excessive leverage contributed to the problems of many banks, leading to the current industry-wide de-leveraging.

CATEGORIZATION OF CORPORATE RISK MANAGEMENT

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MARKET RISK
Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices.

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BUSINESS RISK
Probability of loss inherent in a firm's operations and environment (such as competition and adverse economic conditions) that may impair its ability to provide returns on investment. Business risk plus the financial risk arising from use of debt (borrowed capital and/or trade credit) equal total corporate risk.

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CREDIT RISK
Probability of loss from a debtor's default.

In banking, credit risk is a major factor in determination of interest rate on a loan: longer the term of loan, usually higher the interest rate. Also called credit exposure

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OPERATIONS RISK
A risk arising from execution of a company's business functions

It also includes other categories such as fraud risks, legal risks, physical or environmental risks.

RISK MANAGEMENT POLICY

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The identification and management of risk is central to delivering on the Corporate Objective. Risk will manifest itself in many forms and has the potential to impact the health and safety, environment, community, reputation, regulatory, operational, market and financial performance of the Group and, thereby, the achievement of the Corporate Objective. By understanding and managing risk we provide greater certainty and confidence for our shareholders, employees, customers and suppliers, and for the communities in which we operate. Successful risk management can be a source of competitive advantage.

We will use our risk management capabilities to maximise the value from our assets, projects and other business opportunities and to assist us in encouraging enterprise and innovation. Risk management will be embedded into our critical business activities, functions and processes. Risk understanding and our tolerance for risk will be key considerations in our decision making. Risk issues will be identified, analysed and ranked in a consistent manner. Common systems and methodologies will be used.

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Risk controls will be designed and implemented to reasonably assure the achievement of our Corporate Objective. The effectiveness of these controls will be systematically reviewed and, where necessary, improved. Risk management performance will be monitored, reviewed and reported. Oversight of the effectiveness of our risk management processes will provide assurance to executive management, the Board and shareholders. The effective management of risk is vital to the continued growth and success of our Group.

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