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Introduction to Risk

Management
U.RAMBABU

MBA,MCOM.
Assistant Professor
School of Management Studies
LBRCE, Mylavaram

CONCEPT OF RISK

Risk is involved in every activity whether


it is of professional ,personal or business.
Every individual while doing any activity
expects some returns. But it is obvious
that the actual returns may never be the
same as that of the expected returns
.There always exists a difference between
the expected and the actual returns. This
difference is termed as RISK

Aprobabilityorthreatofdamage,

injury,liability,loss, or any other


negative occurrence that is caused
by external or internalvulnerabilities
, and that may be avoided through
preemptiveaction.

Finance:

The probability that an


actualreturnon aninvestmentwill
be lower than theexpected return

Probability is certain: in a probability of certainty


it is not possible to predict the exact out come,
but a possible number of outcomes can be known
EX: dice
Probability of uncertain: neither exact outcome
nor the number of possible outcomes can be
predicted here risk is highly uncertain in nature
ex: floods ,earthquakes, droughts.

DEPENDING

UPON THE CONDITION ,RISK


IS OF TWO TYPES
Objective risk
the proportional change of actual loss
when compared to expected loss is
termed as objective risk
Ex: manufacturing company
Subjective risk : risk is referred to an
individuals mental condition or state of
mind which is unpredictable

Risk management
Risk

management is a process of
thinking systematically about all
possible risks, problems or disasters
before they happen and setting up
procedures that will avoid the risk, or
minimize its impact , or cope with
its impact

Risk management involves 3 activities


Identification of risk
Measuring the risk
Managing and controlling risk

RISK MANAGEMENT
Identifies
loss
exposures
faced by
an
organizati
on.
Loss
exposure
is any
situation
or
circumstan
ce in
which loss
is possible.

Highlights
the most
appropriate
techniques
for treating
loss
exposures.

Objectives of Risk
Management:

Pre loss :
The firm should prepare for potential
losses in the most economical way.
Reduction of anxiety
Meet any legal obligation.
Post loss:
Survival of the firm
Continue operating
Stability of earning
Continue growth of the firm
Minimize effects that a loss will have
on other persons and society.

Elements of Uncertainty
Possibility

of result may be upside or

down side.
Adverse

result.

Favorable

results.

possibility

of

outcome

being

different form the actual outcome.

Elements of Uncertainty

Certainty happening or non-happening


of an event with 100% probability.

Uncertainty

the

outcomes

are

unknown

Risk number of probable outcome but


nothing is certain and expected.

Elements of Uncertainty
Risk

is measurable.

higher

the probability higher is the

risk.
What

is Risk in the present context

Uncertainty
flows.

of

future

cash

Sources of Risk
Risk

can be either direct or indirect.

Eg: fire destroying the inventory is a


direct damage.
Eg: delay in production or increased
administrative expenses or repair
costs are indirect risks.

Sources of Risk
no

knowledge or little knowledge

Trading

with borrowed money

Natural

calamities (disasters).

change in interest rates.

Stock
Not

market fluctuations.

following the stop loss orders.

Sources of Risk
Political

changes.

Wars.
Damage

of reputation.

Mishappenings
New

in operations.

entrants/substitutes.

Types of Risks:
1.

Interest rate risk.

2.

Exchange risk.

3.

Liquidity risk.

4.

Default risk.

5.

Internal business risk.

6.

External business risk.

7.

Financial risk

Types of Risks:
8. Events of god.
9. Market risk
10. Marketability risk
11. Credit risk
12. Personal risk
13. Environmental risk
14. Production Risk

Types of Risks:
Interest

Rate Risk:

affects the firm in two ways


1. affecting the profit.
2. affecting the value of its assets or
liabilities.
Eg: floating rate and fixed rate

Types of Risks:
Exchange

Risk:

volatility in exchange rates.


exporters are the major sufferers.
Eg: IT comany

Types of Risks:
Liquidity

Risk:

Inability to meet financial obligations.


Eg: blocking money in illiquid assets.
Maintenance of working capital.

Types of Risks:
Default

Risk:

non-recovery of amount dues from


others.
which may lead to inability to pay
money to others.

Types of Risks:

Internal Business Risk:


decision making ability
visualizing future
personnel loss may also come under
this
Eg: loosing skilled labours

Types of Risks:
External

factors

Business Risk:
not

in

the

control

government.
Eg: Delayed monsoons
Fiscal Policy
stability of the government

of

Types of Risks:
Financial

Risk:

level of debt
Smaller the debt smaller is the
risk.
reflects in bankruptcy

Types of Risks:

Event of God:
risk completely due to unexpected events.
Eg: fire accidents
strikes
cyclone
earthquake

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