RISK CATEGORIES OF BUSINESS RISK

IDENTIFYING, ASSESSING, AND MEASURING RISKS

Market Risk
Market risk is the risk from changes in the market price of key
DEFINITION items, such as the price of key commodities. Market prices
• Risk is usually associated with the possibility that things can go up or down, and a company can benefit from a fall in
might go wrong, that events might turn out worse than raw material prices or incur a loss from a rise in prices.
expected or that something bad might happen.
• Risk exists whenever a future outcome or future event Credit Risk
cannot be predicted with certainty, and a range of different Credit risk is the risk of losses from bad debts or delays by
possible outcomes or events might occur. customers in the settlement of their debts. All companies
• Risk comes from the italian work “ Risicare” which means that give credit to customers are exposed to credit
“to dare” risk. The size of the credit risk depends on the amount of
receivables owed to the company, and the ‘credit quality’ of
Investing in stocks. two ways siya pwede advantage pwede the customers.
disadvantage sa business willingness to realize and earn
something. Depends wether risk taker ka or risk averse Liquidity Risk
POSSIBLE ADVERSE EVENT THAT MIGHT HAPPEN Liquidity risk is the risk that the company will be unable to
COUPLED WITH UNCERTAIN make payments to settle liabilities when
BUT ACTUALLY WHEN WE MANAGE RISK. payment is due. It can occur when a company has no money
in the bank, is unable to borrow more money quickly, and has
CATEGORIES no assets that it can sell quickly in the
• PURE RISK market to obtain cash. Companies can be profitable but still
– Also known as DOWNSIDE risk. at risk from a liquidity shortage.
– is a risk where there is a possibility that an adverse event
will occur. Events might turn out to be worse than expected, Technological Risk
but they cannot be better than expected. Technological risk is the risk that could arise from changes in
technology (or inadequacy of technological systems in use).
For example, there might be a safety risk that employees When a major technological change occurs, companies might
could be injured by an item of machinery. This is a pure risk, have to make a decision about whether or not to adopt the
because the expectation is that none will be injured but a new technology.
possibility does exist.
Legal Risk
• SPECULATIVE RISK Legal risk, which includes regulatory risk, is the risk of losses
– Also known as TWO WAY risk. arising from failure to comply with laws and regulations, and
– is a risk where the actual future event or outcome might also the risk of losses from legal actions and lawsuits
be either better or worse than expected.
Health, safety, and environmental risk
For example, an investor in shares is exposed to a speculative Health and safety risks are risks to the health and safety of
risk, because the market price of the shares might go up or employees, customers and the general public. Environment
down. The investor will gain if prices go up and suffer a loss if risks are risks of losses arising, in the short term or long term,
prices go down. from damage to the environment - such as pollution or the
destruction of non-renewable raw materials
• Companies face BOTH pure and speculative risks.
– Pure risks are risks that can often be controlled either by Reputation risk
means of internal controls or by insurance. These risks might It is the risk that a company’s reputation with the general
be called internal control risks or operational risks. public (and customers), or the reputation of its product
‘brand’, will suffer damage. Damage to reputation can arise in
– Speculative risks cannot be avoided because risks must be many different ways: incidents that damage reputation
taken in order to make profits. As a general rule, higher risks are often reported by the media.
should be justified by the expectation of higher profits
(although events might turn out worse than expected) and a Business probity risk
company needs to decide what level of speculative risks are Probity means honesty and integrity. Business probity risk is
acceptable. Speculative risks are usually called business risk, the risk of losses from a failure to act in an honest way
and might also be called strategic risk or enterprise risk
RISK MANAGEMENT STAGES OF RISK MANAGEMENT
• Is the process of managing both downside risks and
business risks.  Risk Identification
• It can be defined as the culture, structures and processes • A company needs to understand what risks it faces, both in
that are focused on achieving possible opportunities yet at its environment and markets (strategic risks) and internally
the same time control unwanted results (operational risks).
• Is considered a corporate governance issue. This means – This may be aided by the creation of a risk committee.
that the board of directors have a responsibility for risk These are committees of managers from several departments
management. or functions. Each committee is responsible for reporting on a
Managing the possible opportunity that comes with the risk particular category of risk or risks in a particular geographical
Risk committeee area of the company’s operations.

ELEMENTS OF A RISK MANAGEMENT SYSTEM identifying all the risk. limitation: there are risk nga dli ma
fully considered. BLACK SWAN
• „ There should be a culture of risk awareness within the RISK.
company. Managers and employees should understand the
‘risk appetite’ of the company, and that excessive risks are • Having identified risks, it is therefore necessary to assess
not justified in the search for higher profits. the importance of each risk, in order to:
• „ There should be a system and processes for identifying, – rank the risks in order of significance (order of
assessing and measuring risks. When risks have been priority), and
measured, they can be prioritised, and measures for – identify the risks that are the most significant, and
controlling or containing the risk can be made. – identify the significant the risks where control measures are
urgently needed.
• „ There should be an efficient system of communicating
information about risk and risk management to managers IT WILL DETERMINE WHICH RISK STRATEGY TO IMPLEMENT .
and the board of directors. RISK APETITE OF THE COMPANY.
Employees of the company willl be well informed about the NAAY SAY MGA RISK NGA INSIGNIFICANT. MAS COSTLY NA
risk HINUON SIYA IF I ADDRESS.
NOT ALL RISK MAY BE ADDREESSED BY THE COMPANY.
• „ Strategies and risks should be monitored, to ensure that
strategic objectives are being achieved within acceptable
levels of risk.  Risk Profiling or Risk Mapping
Naay monitoring system. • This is the stage of actually assessing the risk.
• To assess each risk, it is necessary to consider the likelihood
RISK BASED APPROACH that losses will occur as a consequence of the risk, and the
• It is an approach to decision-making based on a detailed size or amount of the loss when this happens.
evaluation of risks and exposures, and policy guidelines on
the level of risk that is acceptable (risk appetite). Sample risk map
• The risk-based approach takes the view that some risk must
be accepted, but risk exposures should be kept within
acceptable limits
We will not be addressing all risk identified but identify the
priority, and the pinaka risky area. Just monitor it

For example, the customs and immigration

department at a country’s airports might have a policy of
checking the baggage of every passenger arriving in the
country by aeroplane, because the policy objective is to
eliminate smuggling of prohibited goods into the country by
individuals
 Measuring risks
.• With a risk-based approach, the department will take the • Measuring risk means quantifying the risk. When risks are
view that some risk of smuggled goods entering the country quantified, the risk can be managed through setting targets
is unavoidable. The policy should therefore be to try to limit for maximum risk tolerance and measuring actual
the risk to a certain level. Instead of checking the baggage of performance against the target.
every passenger arriving in the country, customs officials • Where risks are assessed in qualitative terms, risk
should select passengers whose baggage they wish to search. management decisions become a matter of management
Their selection of customers for searching should be based judgment.
on a risk assessment – for example what type of customer
is most likely to try to smuggle goods into the country? Plot it in the Risk Matrix

Action plan
 Monitor the risk
uNEDING CYCLE NI.
AFTER MONITORING KAY MO IDENTIFY NASAD MOS MGA
RISK NGA WALA NA IDENTIFY.
THEN CHECK TONG MGA RISK NGA NEED UG IMPROVEMENT
SA ACTION PLAN.