Expected Learning Outcomes:
1. Define Risk Management
2. Explain the basic principles of risk management
3. Describe the elements of risk management
4. Define the relevant risk terminologies
5. Describe the potential treatments or approaches in managing
risk
6. Explain the area of risk management
7. Describe the steps in the risk management process
8. Familiarize yourself with the SEC requirement in dealing with
enterprise-wide risk management
Risk Management—the process of measuring or assessing risk and
developing strategies to manage it.
— is a systematic approach in identifiying, analyzing, and
controlling areas or events with a potential for causing unwanted change.
As defined in the INTERNATIONAL ORGANIZATION OF
STANDARDIZATION(ISO 3100) 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 and to maximize the
realization of opportunities.
BASIC PRINCIPLES OF RISK MANAGEMENT
1. Create value— resources spent to mitigate risk should be less
than the consequence or inaction
2. Address uncertainty and assumptions
3. Be an integral part of the organizational process and decision
making
4. Be dynamic, iterative, transparent, tailorable, and responsive to
change
5. Create capability of continual improvement and enhancement
considering the best available information and human factors
6. Be systematic structured and continually or periodically
reassessed
PROCESS OF RISK MANAGEMENT
1. Establishing the content
o Identification ofrisk in a selected domain of interest
o Planning the remainder of the process
o Mapping out of the following
i. The social scope of risk management
ii. The identity and objectives of stakeholders
iii. The basis upon which risks will be evaluated,
constraints.
o Defining a framework for the activity and an agenda for
identification
o Developing Nan analysis of risks involved in the process
o Mitigation or solution of risks using available
techoinological, human and organizational resources
2. Identification of potential risk
Common risk methods are:
Objective-based risk
Scenario-based risk
Taxanomy-based risk
Common-risk checking
Risk charting
3. Risk assessment
ELEMENTS OF RISK MANAGEMENT
1. Identification, characterization, and assessment of threats
2. Assessment of vulnerability of critical assets to specific threats
3. Determination of the risk
4. Identification of ways to reduce those risks
5. Prioritization of risk reduction measures based on a strategy
RISK ASSOCIATED WITH INVESTMENTS
i. Business Risk
ii. Financial Risk
iii. Liquidity Risk
iv. Default Risk
v. Interest Rate Risk
vi. Management Risk
vii. Purchasing Power Risk
Business Risk— refers to the uncertainty about the rate of return caused by
the nature of the business.
Financial Risk—the firm’s capital structure or sources of financing determine
financial risk.
Liquidity Risk—is associated with the uncertainty created by the inability to
sell the investment quickly for cash.
Default Risk—related to the probability that some or all of the initial
investments will not be returned
Interest Rate Risk—is most commonly associated with bond price
movements, rising interest rate cause bond prices to decline and declining
interest rates cause bond prices to rise
Management Risk—decision made by a firm’s management and board of
directors materially affect the risk faced by investors.
Purchasing Power Risk—more difficult to recognize than the other types of
risk.
RISK ASSOCIATED WITH MANUFACTURING, TRADING AND
SERVICE CONCERNS
A. Market Risk
Product Risk
o Complexity
o Obsolescence
o Research and development
o Packaging
o Delivery of warranties
Competitor Risk
o Pricing strategy
o Market share
o Market strategy
B. Operations Risk
Process stoppage
Health and safety
After sales service failure
Environmental
Technological obsolescence
Integrity
o Management fraud
o Employee fraud
o Illegal acts
C. Financial Risk
Interest rate volatility
Foreign currency
Liquidity
Derivative
Viability
D. Business Risk
Regulatory change
Reputation
Political
Regulatory and legal
Shareholder relations
Credit rating
Capital availability
Business interruptions
RISK ASSOCIATED WITH FINANCIAL INSTITUTIONS
FINANCIAL NON-FINANCIAL
Liquidity risk Operational risk
Market risk o Systems
o Currency Information
processing
o Equity Technology
o Commodity o Customer
satisfaction
Credit risk o Human resources
o Counterparty o Fraud and illegal acts
o Trading o Bankcruptcy
o Commercial Regulatory risk
Loans o Capital adequacy
Guarantees o Compliance
Market liquidity risk o Taxation
o Currency rates
o Interest rates o Changing laws and
policies
o Bond and equity Environment risk
prices
Hedged positions risk o Politics
Portfolio exposure risk o Natural disasters
Derivative risk o War
Accounting information risk o Terrorism
o Completeness Integrity risk
o Accuracy o Reputation
Financial reporting risk Leadership risk
o Adequacy o Turnover
o Completeness o Succession
