Risk Management

1. Market risk is the risk arising from adverse movements in market prices. Market risk
includes changes in the price of commodities (such as those required for production), and
changes in equity prices, interest rates, and foreign exchange rates.
2. Credit risk is the risk arising from the potential that a borrower will fail to pay a debt.
3. Liquidity risk is the risk that the business will have insufficient liquid assets to meet
obligations that come due.
4. Operational risk has no universally accepted definition. It is most commonly defined as

the risk of loss from inadequate or failed internal processes, people, or systems or from
external events
5. Reputational risk: the potential that negative publicity will cause a loss
6. Strategic risk: the risk of failing to successfully implement the firms strategies
7. Compliance risk: the risk of failing to comply with laws and regulations.

Risk Management Defined

Risk management is a scientific approach to dealing with risks by anticipating possible
losses and designing and implementing procedures that minimize the occurrence of loss
or the financial impact of the losses that do occur
Risk Control
Risk control: consists of those techniques that are designed to minimize, at the least
possible costs
Risk control methods include risk avoidance and the various approaches at reducing risk
through loss prevention and control efforts
Risk Avoidance
Risks are avoided when the organization refuses to accept the risk, even for an instant.

Risk Reduction
Risk reduction consists of all techniques that are designed to reduce the likelihood of
loss, or the potential severity of those losses that do occur,

Referring to them respectively as loss prevention and loss control. As the designation implies,
the emphasis of loss prevention is on preventing the occurrence of loss that is, on controlling the
frequency. Prohibition against smoking in areas where flammables are present is a loss
prevention measure.
Risk Financing
Risk financing, in contrast with risk control, consists of those techniques that focus on
arrangements designed to guarantee the availability of funds to meet those losses that do occur.
Risk Retention
Risk retention is perhaps the most common method of dealing with risk.9 Individuals,
like organizations, face an almost unlimited number of risks; in most cases, nothing is done about
them.
. Unintentional (unconscious) retention occurs when a risk is not recognized.
Risk Transfer
Risk transfer is the process of hedging, in which an individual guards against the
Risk of price changes in one asset by buying or selling another asset whose price changes in an
offsetting direction
THE RISK MANAGEMENT PROCESS
The risk management process can be divided into a series of individual steps that must be
accomplished in managing risks.
1. Determination of objectives: deciding precisely what it is that the organization would like its
risk management program to do.
Post-Loss Objectives

Pre-Loss Objectives

Survival

Economy

Continuity of operations

Reduction in anxiety

Earning stability

Meeting externally imposed obligations

Continued growth

Social responsibility

2. Risk Identification Techniques: The first step in risk identification is to gain as thorough

knowledge as possible of the organization and its operations.

Analysis of Documents The history of the organization and its current operations are contained
in a variety of records. These records represent a basic source of information required for risk
analysis and exposure identification.
Flowcharts Another tool that is useful in risk identification is a flowchart. A flowchart of an
organizations internal operations views the firm as a processing unit and seeks to discover all the
contingencies that could interrupt its processes.
Internal Communication System To identify new risks, the risk manager needs a far-reaching
information system that yields current information on new developments that may give rise to
risk.