RISK AND UNCERTAINTY

Group Members
Atul P Mumbarkar 44

Nimesh S Sawant 65
Praful Bhalerao 4 Rahul H Kadam 23

Umesh More - 41

Introduction
In real world, most future events are not known to us with their degree of certainty. Managers are supposed to take decision relying on some estimates which again involves some uncertainty. So, Risk and uncertainty will always be a part of our analysis.

What is Risk ?
Risk refers to the set of unique outcomes for a given event which can be assigned probabilities

What is Risk ?
In other words, we can also define risk as, a probability or threat of a damage, injury, liability, loss, or other negative occurrence that is caused by external or internal vulnerabilities and that may be neutralized through preemptive action.

What is Uncertainty
Uncertainty refers to the outcomes of given event which are too unsure to be assigned probabilities

What is Uncertainty
In other words, we can define Uncertainty as a decision making situation where the current state of knowledge is such that the order or nature of things is unknown, the consequences, extent, or magnitude of circumstances, conditions or events is unpredictable and credible probabilities to possible outcomes cannot be assigned.

Risk V/s Uncertainty

Risk is when future events can be defined and
probabilities can be assigned and uncertainty is when future events cannot be defined and probabilities of it occurrence cannot be assigned.

Risk V/s Uncertainty

Risk and Uncertainty are concepts that talk
about expectations in future, but whereas you can minimize risk by taking some preventive measures to face an uncertain future, but you cannot remove uncertainty from life altogether.

Risk V/s Uncertainty

Risk is when we know the outcome of any
given activity or event but Uncertainty is when we do not know anything about the outcome of any given activity or event.

Risk V/s Uncertainty

Risk is calculable and measurable while
uncertainty is not.

Risk V/s Uncertainty

Risk, if calculated, can be insured. Thus, insurance companies can predict with a high degree of accuracy the probabilities of deaths, accidents, and fire losses. These probabilities enable them to make decisions about premium levels an rates.

Risk V/s Uncertainty

A decision making situation in which the possible
outcomes can vary and the probability of the occurrence of each outcome is known is said to be a risky situation

While a decision making situation, in which the possible outcome are many and the probability of these outcomes are not known is said to an uncertain situation.

Risk Attributes
Risk Aversion:
Individuals seek to avoid or minimize risk. A description of an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk.

Manhole

Risk Attributes
Risk Neutrality:
Individuals focus on expected returns and disregard the dispersion of returns (risk). A riskneutral investor is more concerned about the expected return on his or her investment, not on the risk he or she may be taking on.

Manhole

Risk Attributes
Risk Seeking:
Individuals prefer risk. Risk seekers might pursue investments which are risky.

Manhole

Risk Attributes
Choice between more risky and less risky investments with identical returns: Risk averter chooses the one with less risk

Risk seeker chooses the one with high risk

Risk neutral is indifferent between the choices

Types of Risk
MARKET
RISK REPUTATION RISK CREDIT RISK

STRATEGIC RISK

Types of Risks

LIQUIDITY RISK

BUSINESS RISK

OPERATIONAL RISK LEGAL AND REGULATORY RISK

Market Risk
Market risk is the risk that changes in financial
market prices and rates will reduce the monetary value (e.g. Rs., US $, UK ) of a security or a portfolio.

There are four major types of market risk 1. Interest Rate Risk 2. Equity Price Risk 3. Foreign Exchange Risk 4. Commodity Price Risk

Types of Market Risk

Interest Rate Risk: The simplest form of interest
rate risk is the risk that the value of a fixed income security will fall as a result of an increase in market interest rates.

Equity Price Risk: The risk associated with

volatility in stock prices. The general market risk of equity refers to sensitivity of an instrument or portfolio value to a change in the level of board stock market indices.

Types of Market Risk

Foreign Exchange Risk:
Foreign exchange risk arises from open or imperfectly hedged positions in a particular currency. These positions may arise as a natural consequence of business operation, rather than from any conscious desire to take a trading position in a currency.

Types of Market Risk

Commodity Price Risk:
The price risk of commodities differs considerably from interest-rate and foreign exchange risk, since most commodities are traded in market in which the concentration of supply in the hand of a few suppliers can magnify price volatility

Credit Risk
Credit risk is the risk that a change in the credit quality of counterparty will affect the value of security or a portfolio.

Liquidity Risk
Liquidity risk comprises both funding liquidity risk and asset liquidity risk, although these two dimension of liquidity risk are closely related.

Liquidity Risk
Funding liquidity risk relates to a firms ability to raise the necessary cash to roles over its debt; to meet the cash , margin and collateral requirements of counterparties: and (in the case of fund) to satisfy capital withdrawals.

Liquidity Risk
Asset liquidity risk, often simply called liquidity risk, is the risk that an institution will not be able to execute a transaction at the prevailing market price because there is, temporarily, no appetite for the deal on the other side of the market.

Operational Risk
Operational risk refers to potential losses resulting from inadequate system, management failure, faulty controls, fraud, and human error

Legal and Regulatory Risk

Legal risk is a type of risks that means that a counterparty is not legally able to enter into a contract. Another legal risk relates to regulatory risk, i.e., that a transaction could conflict with a regulator's policy or, more generally, that legislation might change during the life of a financial contract.

Business Risk
Business risk refers to the classic risk of the world of business, such as uncertainty about the demand for products, the price that can be charged for those products, or cost of producing and delivering products

Strategic Risk
Strategic risk refers to the risk of significant
investments for which there is high uncertainty about success and profitability. If the venture is not successful, then the firm will usually suffer a major write-off, and its reputation among investors will be damaged.

Reputation Risk
Reputation risk is the risk of causing any harm to the reputation of any individual or organization in case of any scam or scandals. For example, there was a reputation risk to Price Water Cooper house accounting firm due to Satyam scam.

General Methods of Dealing with Uncertainty

Referral to authority for guidance:
This is a very pragmatic to the reduction of uncertainty. In some cases, there is literal authority such as wage boards, industrial relations commission ,bureau of industrial costs and prices. Whatever such authorities decide, management accepts them

General Methods of Dealing with Uncertainty

Control of the environment:
This approach usually takes the from of attempts to gain a monopoly by means of patents, exclusive dealership, contacting and influencing important officials who matter etc.

General Methods of Dealing with Uncertainty

Hedging:
It is a very common method by which business executives can replace future uncertainty with the security of a present contract .hedging takes many forms; it emerges most commonly in the writing of contracts for goods and services, and it trading of futures at commodity exchanges.

General Methods of Dealing with Uncertainty

Diversification:
This is closely related to flexibility. There is an old adage dont put all your- eggs in one basket". in view of this, to minimize risk and uncertainty, business often, go for diversification of their products, source of raw materials, markets etc.

General Methods of Dealing with Uncertainty

Modification of goals:
In the face of complete uncertainty, an optimal decision might be impossible. Knowing this, many times a behavioral firm, you may recall, attempts modification of its goal-its target variables. This is a practical approach to face the uncertain environment.

General Methods of Dealing with Uncertainty

Flexible investments: The investor often takes care of flexibility while deciding on long run investment. For example, a general-purpose machine. but when changes and frequent, it is less riskier to invest in a generalpurpose machine.

General Methods of Dealing with Uncertainty

Purchasing Insurance: We all purchase insurance policies that involves paying a premium to protect ourselves against different kinds of risks - accident, fire, death, etc. Insurance is commonly available for losses due to fires, accidents at workplace, theft and fraud. whether an insurance is required or not depends on the degree of risk averseness of the buyers, their assessment of the severity of the consequences of the event occurring, and the premium itself.