AME UNIVERSITY

GRADUATE SCHOOL OF INTERNATIONAL STUDIES

INTERNATIONAL FINANCIAL MAKKETS

Research Project Paper

Topic:
RISK MANAGEMENT AND MITIGATION COMPRISE
AN ESSENTIAL ELEMENT WITHIN IFM. FULLY ADDRESS THIS
MATTER WITH REFERENCE TO THE AFOREMENTIONED
FRAMEWORK

AMBASSADOR M. NATHANIEL BARNES

August 22, 2021

Submitted by: Sam Cleon

ID#: 2020003

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Content

I. Introduction
II. Definition of risk
III. Types of risk
▪ Credit risk
▪ Market risk
▪ Operational risk
IV. How risks are determined
V. What is risk management
VI. Building-Block Approaches to Risk Management.
VII. The go for in investment that leads to uncertainties
▪ The Impact of Uncertainty on Investing
▪ The Micro and Macro Risks variable
▪ The role, effect and impact of Micro Risks
VIII. Consequences of inaction if these variables are not
maintained.
▪ The Relevance: A Need for Enterprise Risk Management
IX. Consequences of inaction if these variables are not
maintained
X. Conclusion

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Introduction

The origin, history and background of the selected term “Risk” comes
from vary trace but points to game, which was usually coin tossing
puzzle rules but later modified the term as risk.
The understanding of risk management and mitigation in IFM
comprises of several important factors that identifies the
uncertainties in business transactions. Firstly, one need to understand
the various types of risk that exist in the world of investment and their
measures of minimization. In this research review, risk defines how
successful an investment will be or how effective government or
private investment entities matches their capital to suit their
mitigation and meet their expected result.
If risks are not involved with financial market there will be no
successful or investment activities. In investment there exist risk for it
cannot be detached, with the mitigating attributes, companies,
governments and individual investors seek to apply to meet market
expectations. As this paper further explain and give the forces
against market and the problem resolving components you will
realize that market is the place of success.

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Firstly, what is risk?

Risk is when the probability of an actual result appears differently from the expect
results its risk. From the capital asset pricing point of view, it’s the volatility of returns.
Before going further there are several types of risk which are essential to review to
have the base of this study. For every healthy economy the Banking industry is the
backbone which is directly related to the financial health of its banks.
So, they provide a vast variety of services to both retail sector and also the
corporate sector. Due to the vast variety of services provided by the banking
industry, there are a myriad of risks involved in the banking industry.
It’s important to reduce these risks in order to maintain the health of the banks
and essentially, the health of the economy.

The types of risks with respect to finance, what are they;

A. Credit risk - is the possibility of a lost which result from a borrower’s failure
to repay funds been borrowed and its contractual terms, that also includes
the delays in payment of the funds as well.

Credit defaults have never changed it has always been one of the biggest or
largest concerns in the financial industry as is evident by the catastrophic 2007-08
financial crisis which began due to the inherent credit risk in the financial sector.
The impact of credit risk on financial institutions are determined by the structure
of the institution balance sheet, in particular the capital base of every institution
signifies the extent to which losses can be sustained and insolvency can be
avoided in the case of loan defaults higher than what is accounted for in the
balance sheet.

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What are the types of Credit risk?
➢ Counterparty Credit Risk: when we say counterparty credit risk it’s the
coverages of default risk as well as credit migration risk of the counterparty
reflected in mark-to-market losses on the expected counterparty risk.

Counterparty risk may derive from the context of over the counter (OTC)
derivatives and Securities Financing Transactions.

➢ Credit Concentration Risk: The fact that concentration of credit risk is the
risk at distribution of exposures to a few customers and trading partners
where in potential default by a relatively small group of counterparties or
large individual counterparties is driven by a common underlying cause.

This will include concentration of borrowers, concentration by economic sector,

concentration of counterparties in trading activities, etc.

➢ Country Risk: Country risk refers to potential losses that may derive from an
economic, political event that occurs in a specified or particular country,
where the event is controlled by that country, that is by its government, and
not the credit grantor or investor.

B. Market risk: is that possibility that an individual’s or company’s investments

in securities might be failure in delivering returns expected, or the securities
might fall in value. Market risk is faced with all the market participants and
viable hedging mechanisms have to be establish by the individuals or
companies to protect themselves from the market risk prevalent throughout
the year.

Types of Market Risk

➢ Equity Risk: Equity risk refers to the risk associated with the values of the
stock prices, stock indices and the associated volatility.

➢ Interest Rate Risk: this risk refers to the possibility that market interest rates
might increase, obliging a bank to pay higher interest to their depositors,

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 while the interest received from borrowers remains unchanged for loans
with interest rates that the bank cannot alter immediately.

➢ Currency Risk: sometimes called Exchange-rate risk refers to the risk of

losses that is involved due to movements in the foreign exchange rates and
is faced by banks holding assets and liabilities in different currencies.

➢ Commodity Risk: refers to the risk associated with the values of the
commodity prices and the associated volatility.

C. Operation risk: is that risk of losses associated with the operations of an

invested resources. Notwithstanding it includes the risk due to terrorist
activities, natural disasters, negligence and human error, fraudulent
behaviors on the part of the employees of the investing party. There is not
much that can be done in order to limit this risk.

Types of Operational Risk

➢ Internal Fraud: includes misappropriation of assets, tax evasion,

intentional mismarking of positions, bribery etc.

➢ External Fraud: this includes theft of information, hacking damage, third-

party theft and forgery etc.

➢ Employment Practices and Workplace Safety: includes discriminatory

acts, workers compensation, employees’ health and safety etc.

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 ➢ Clients, Products, and Business Practice:
includes market
manipulation, antitrust, improper trade, product defects, fiduciary
breaches, account churning etc.

➢ Damage to Physical Assets: is influenced by natural disasters, terrorism,

vandalism etc.

➢ Business Disruption and Systems Failures: that is to include utility

disruptions, software failures, hardware failures etc.

➢ Execution, Delivery, and Process Management: includes data entry

errors, accounting errors, failed mandatory reporting, negligent loss of client
assets etc.

Reference (maxeler technologies / analyticsteps.com)

How risk is determined?

Risk management, financial or otherwise, follows a logical process. At this point it
involves three steps:
A. An awareness of the risks being taken by the firm, organization or individual,
B. Measurement of the risks to determine their impact and materiality, and
C. Risk adjustment through the adoption of policies or a course of action to
manage or reduce the risks.

Risk Awareness: the obviousness of how we may become aware of or identify

risks. Some risks will be well known since they have long been identified, while
other risks emerge as a result of changing conditions. Management may have
prior awareness, or there may be a specific experience of certain risks.

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Other methods that give awareness of risks (Module 1 / Introduction Financial Risk Management
Edinburgh Business School 1/37) include standard analytic methods such as fault
tracing, the use of experts (for instance Delphi forecasting), scenario building (via
an investigation of Murphy’s law – that is, what can go wrong will go wrong), that
is brainstorming, and other similar approaches used to identify the factors in a
particular industry, economic environment or within the firm. The careful
examination of accidents that happen to others is also useful in creating
awareness. Being aware of risks is an ongoing discovery exercise that needs to be
repeated at frequent intervals to capture changed conditions. As human beings,
we also have the problem that we may not either perceive the risk or be able to
assess its significance due to our interpreting or understanding of data through
our own ‘mind viewer’, so in addition, different financial markets have varying
degrees of efficiency, market transparency and development.

According to Dominic Casserley (1993), suggested three levels of risk awareness.

➢ Risks that are unknown and unmeasurable (that is, they have not
manifested themselves or have not been perceived). An example would
be the global interlinkages that affected banks and other financial
institutions in the wake of the collapse of the US housing market 2007-2008.
The contagion effect from the global holding of various kinds of collateral
debt obligations (CDOs) were unexpected, especially since CDOs were
supposed to diversify risk rather than enhance it. While few commentators
had questioned the suitability of CDOs as financial instruments, no one had
understood the systemic risk that the wide dissemination of these
instruments had created. Banks in virtually every single major country were
adversely affected by the collapse in the CDO market and in a number of
countries needed government support, feared that some banks were
holding large quantities of CDOs and other such “toxic assets” caused a
virtual collapse of the world financial system in 2008, and only intervention
by governments, regulators and central banks prevented the system from
totally failing.

➢ Risks that are known but still unmeasurable, (where even though the
risk is known, but there are insufficient data on which to base an evaluation
of the likely consequences or quantify the exposure). Taking the Greek crisis
that started in the late 2009 as a study or scenario base situation, when the

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 government of Greece announced that they were far from having a
manageable budget deficit as previously forecasted 3.7 percent of her
GDP, which actually was an unsustainable 12.7 percent. Months later, May
2010, the country was given a bailout by the European Union and the
International Monetary Fund, because of the risk of a country defaulting is
known, which makes it hard to measure, while there were relatively few
countries and few incidences of default. In addition, there were individual
factors that made each country’s case unique. For instance, Ireland and
Portugal were also given European Union assistance later on also because
of their individual factor’s uniqueness. There were common factors that
affect all three countries, but, equally, the causes of their need for bailouts
to prevent default were also country specific.

➢ Risks that are both known and measurable. (In such cases, there are
many observations on which to build a statistical model in order to predict
future behaviors.) This is the situation with which risk management typically
has to deal, when organizations seek to measure their exposure to the
principal financial risk factors. As discussed earlier, we have historical data
on currency exchange rates, commodity prices and interest rates that
show how these have fluctuated considerably over time.

Risk measurement: this transformation is difficult to measure into quantifiable

risks. The main stream task initially is to model risk in order to measure its impact.
Once the extent of the exposure has been determined, decisions about the
appropriate course of action can be made. Typically, it’s the procedure to
evaluate these risks using a cost–benefit approach (or, alternatively, the risk–
reward trade-off) according to predetermined criteria. In principle this decision
will depend on the costs and benefits involved in the different courses of action.
There will be a tradeoff between the benefits of risk reduction and the costs to be
incurred. Normally the risks are contingent, while the costs involve actual cash
outlays (for instance, insurance premiums against damage to property from fire,
floods, etc. that may never occur). Also, many risk-reducing measures may
involve opportunity costs – eliminating the potential for loss may also eliminate the
potential for gain. In practice, organizations will also have different views about
the level and types of risk that are acceptable, consequently, there is no hard

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and fast rule governing any particular course of action. Indeed, one aspect of risk
measurement involves determining the organization’s own risk-taking approach.

Risk adjustment: this involves changing the nature of the risk from an undesirable
level to an acceptable one. There are three existing different approaches
include;

Elements of risk pooling and risk transfer, this approach involves insurance,
where the risk can be transferred to another party better able to accept the risk.
Many kinds of standard risk can be insured at a price (which is known as a
premium). The problem is that, as risk to be insured becomes more specific to a
particular organization, the insurers have the same problem as the insured, they
will have the same difficulty in quantifying the risk, and the price of such insurance
will rise to reflect this uncertainty.

The second approach uses hedging, this is a principle of offsetting one risk
with an opposite position in the same or similar risk, in this approach if the hedge
works, the two risks should be self-cancelling. A decision can be made about how
much of the total risk is to be hedged. Many organizations undertake two different
kinds of hedging, which are namely and discussed;

➢ Operational hedging (which shares some of the characteristics of the

third approach discussed below), it involves the firm in changing sources of
supply, their manufacturing location and so on in order to reduce the
economic factors impacts. The firm then also seek to match inflows and
outflows in foreign currencies so as to become self-hedging.

➢ Financial hedging, uses both on-balance-sheet and off-balance-sheet

instruments. Organizations using foreign-currency-denominated reporting,
under the current International Financial Reporting Standards (IFRS), which
is the accounting distinction between what is reported on the balance
sheet and transactions that were once not so reported (Module 1 / Introduction
Financial Risk Management Edinburgh Business School 1/39 borrowings), for instance, seek
to eliminate foreign exchange rate risk by using foreign currency income to
service the foreign currency loan. This encourages the effect of creating
new liabilities and tend increasing the size of the balance sheet items. On
the other hand, the great expansion in what were formerly off-balance-
sheet instruments (largely through the use of derivatives) used to manage
financial risk has greatly increased the organization’s scope for such

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 financial engineering. The advantageous component of these specialized
instruments is that, they are relatively at a low cost but can be rapidly
adjusted to take account of changing economic circumstances.

➢ On-balance-sheet hedging is less flexible in this regard and becomes

very inflexible when real assets, such as property and plant, are involved.
This approach involves accepting the risk but reducing some of the more
undesirable aspects by changing behaviors. This typically involves strategic
decisions making by organizations that seek to minimize undesirable risks.
For instance, in some parts of the world, there is considerable country risk
and political risk. To cope with such a position, firms might form consortia,
that is to spread the risks, or joint ventures with local firms better viable to
understanding local conditions. This alternative will involve breaking down
and separating the component risks in any given situation and assuming
only the acceptable risks. Such form is called “cherry picking” of risks and it
is typically seen in certain kinds of capital or venture-type projects which is
normally practice in project financing, where different parties connected
with the undertaking accept different parts of the overall risks involved.
Although the above suggests a sequential approach, risk analysis and
management is in fact a dynamic situation, as the perception of risks
evolves over time. As with so many management tasks, risk assessment has
to be kept under constant review as circumstances change, in addition, as
organizations become more familiar with different risks, they are better able
to assess these and handle consequences.

What is risk management?

Risk management is the process of identification, analysis, and acceptance or
mitigation of uncertainty in investment decisions. How does it get effective? Risk
management occurs when an investor or fund manager analyzes and attempts
to quantify the potential for losses in an investment, such as a moral hazard, and
then takes the appropriate action (or inaction) given the fund's investment
objectives and risk tolerance.

In risk management these are several requirements namely; analysis, policy

formulation and operational procedures that puts in order proper managerial
and control to ongoing risks in business firms. In this generic model, with its five

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steps, show the approaches, in the formulation and execution of the risk
management strategy which is deemed to be simultaneously taking place at
different levels within the firm, and within different functions and business units,
over time.

Exposure’s identification
Profile of business risks
Classification of exposures
Materiality ranking

E B

Ongoing review Formulation of

management planning
Reassessment in light of and policies
-Performance
-changing environment Integration of strategic goals
-changing business Organizational structure
Establishment of responsibility
and accountability

D C

Control and Policy implementation

evaluation exposure
Management methods transaction
Reporting of exposures
Execution reporting and
Evaluation of performance
audit documentation

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In this chart suggest how strategy risk management is in every given institution, but
most especially in the financial industry. The identification of exposures (A) leads
to the formulation of an appropriate managerial response, that is policies
formulation or framework for curtailing risk purposes.
(B) At This level the implementation at the business unit and functional levels, with
the appropriate set of controls and evaluation criteria are rollout.
(C) Determines the policy’s effectiveness
(D). The results of the implementation stage are then reviewed in the light of the
firm’s overall corporate performance
(E) Changes in strategic objectives, and the changing business environment,
which in turn restarts the evaluation process, leading to changes in policy (A). This
process is continuous as in our decision approach, the risks are kept under
constant review. It is because the nature of firm changes over time, as also the
risks it faces. The risk management process is, therefore, a continual adjustment of
the firm’s exposures in the light of changing conditions, the firm’s own capacity
to operate its hedging and insurance programmed, and the cost–benefit trade-
offs involved.

Building-Block Approaches to Risk Management.

The senior management of an organization will normally view the risk

management process by reviewing the overall risk from all sources. It is their sole
responsibility to formulate policy that will govern how much risk is acceptable. In
some countries such as the United Kingdom companies are legally obligated to
undertake a risk review and publish in their annual report, so within an
organization, the amount of risk that the firm considers acceptable will be
translated into a hierarchy of risk limits, where as a commonly accepted criterion
is for firms to seek to ‘maximize shareholder value. This suggests concentration on
the impact of risk on a firm’s market value or equity value.
Senior management decision on the overall exposures and the anticipated
movements in the risk factors is worthy of any institution. For instance, issues about
interest rates in the likelihood of changes in new direction and their impacts on
profitability may lead to decisions about the type and maturity of debt in the
balance sheet, however, because senior management has or may experience
difficulties in reacting to changes within an appropriate timescale, such decisions
are normally delegated to a specialist committee or the Subject matter experts

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(SME). The common approach in most banks is to delegate decisions about the
right level of sensitivity to interest rates and choices of funding to an Asset Liability
Management Committee (ALMAC). Given this objectives of a particular entity,
senior management is given decision to what level to delegate responsibility.

Noticeably there are three distinct approaches that can be adopted in modelling
and measuring risk, they include and being discussed below;
They can be termed;
An Equity–value approach, An Asset–liability approach and, Transactional or cash flow
approach.

➢ Equity Value It is a principle of finance that liquid capital markets are

information efficient; that is, the price of financial instruments reflects known
facts about the issuer. The market price of any security is the direct
reflection of the consensus view on what the asset worth. Market
participants act upon receipt of new information and revise their
assessment on the basis of that new data and act in response. The
occurrence of this reflects the movement on the prices which impact the
entity or the security’s cashflow. As the price movement gets greater (or
sensitivity) for a given change in a risk factor, the greater the market’s
estimate of the firm’s exposure to that particular risk. For which, such
estimates are historical since they measure the impact after the fact.

➢ Asset–Liability approach gives management organizations access to

information that is not generally available to non-participants, because this
can be used for assessing their financial risks. This degree of sophistication
applied in measuring exposure in this way will depend on the availability,
quality and cost of suitable data. In this traditional approach it focuses on
the accounting numbers through the budgeting and reporting process,
although for risk management purposes this type of information may not be
sufficiently timely, detailed or accurate to give exact measurements.
Organizations can and do collect other data that is not strictly accounting
information but that forms part of the information that these organizations
collect on their operations and related outside parties, such as suppliers
and customers. Accounting methods have tended to involve scenario-
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 building or maturity-gap and funding-gap type analyses based on
accounting entries.

With Maturity- and funding gap methods, it breaks up future assets and
liabilities into discrete time intervals (for example, by quarter years), and the
mismatch between receipts and payments are used to determine the net
amount of risk in any single period. This method relatives simply to apply
often easier for firms to collect information on their assets and liabilities,
which only change relatively slowly over period, than to have accurate
forecasts of their future transactions or cash flows.

➢ Transactions and the Cash Flow Approach, this approach straightly

focuses on changes to cash flows as the key sensitivity measure.
Transactions-based approach usually begin at the level of the single
transaction, building up individual exposures and netting the differences
where applicable in order to build an overall (net) position to be managed
from the ground up.
This is often done in large organizations, for example in foreign exchange
management, through factoring arrangements between subsidiaries in
different countries. The different currency exposures are pooled, and only
the net residual difference has to be hedged. Using this method to manage
contingent and economic risks has the disadvantage that it requires
knowledge of the future cash flows from the business. In most instances, this
will be impossible to determine since such cash flows will not be known with
certainty. Organizations could find themselves over hedging their risks.

A. The go for in investment that leads to uncertainties

In our everyday lives it seems like the world has interconnection or global village.
If you monitor any financial channel on the television or read the news online, you
will realize how events in one country seem to have an ever-increasing effect on
other countries around the world. Certain aspects of globalization can have
positive benefits, but when threats of financial crisis, war, global recession, trade
imbalances, etc. do occur, it mostly leads to the talk of moving funds to more

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safer investments and increasing government deficits. For which the rising
uncertainty confuse even the well-informed investor.

There is always a level of risk and uncertainty level is involved always when
investing, that is when increased in times of wars, recessions, pandemics, and
other negative occurrences. When hard times emerge, most investors move their
funds out of equities to safer assets, such as precious metals, government bonds,
and money-market instruments.
This movement of investor capital from equities to safer assets causes
depreciation in the stock market.
Uncertainty normally impacts any given situation, least to say the economy on
both the micro and macro level: On the micro level it focuses on companies and
individuals, while on the macro level it focuses on the overall economy, like global
oil prices and the flight of capital.
Being well informed and adjusting your investment strategy as events change
over time will allow you to invest wisely during uncertain times.

Diversification is a very important investment strategy that prevents significant

losses if one area of portfolio takes a serious hit.

➢ The Impact of Uncertainty on Investing

Any time you invest or engage your fund at risk in an attempt to profit, there is an
inherent level of uncertainty. So, when there exist new threats such as war or
recession arise, the level of uncertainty increases significantly as companies can
no longer accurately predict their future earnings. As a result, there is an increase
in institutional investors reduction on holdings in stocks considered unsafe and
move the funds to other asset classes like mentioned in previous paragraph,
precious metals, government bonds, and money-market instruments.
Uncertainty is the inability to forecast future events. The prediction of people to
know the extent of a possible recession, the beginning and end date, the costing
effect, or what companies will be able to make it through unharmed. Most
companies normally predict sales and production trends for the investing public
to follow assuming normal market conditions, but increasingly and interestingly
uncertainty levels can make these numbers significantly inaccurate.

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 ➢ The Micro and Macro Risks variable

Uncertainty itself can affect the economy on both the micro and macro levels.
Uncertainty on a micro-level center around the effect on individual companies
within an economy faced with the threat of war or recession, while uncertainty
on a macro-level tends to look more at the economy as a whole.

➢ The role, effect and impact of Micro Risks

From a micro-level, uncertainty which is company-specific viewpoint, provides

significant concern for the producer of consumer goods on our everyday market.
For example, the consumption may fall on the threat of a recession as individual
countries or individuals refrain from purchasing gold, gadgets, new vehicles and
other non-essentials.

This uncertainty may force some companies in certain sectors to redundant some
of their employees to combat the impacts of lower sales. The level of uncertainty
that surrounds a company's sales also extends into the stock market.
Consequently, stock prices of companies that produce non-essential goods may
sometimes experience sell-off when levels of uncertainty increase.

➢ The role, effect and impact of Macro Risks

With macro-level, uncertainty is magnified when or if countries at war are major

suppliers or consumers of goods. An example country (United States, Russia and
Saudi Arabia) suppling large portion of the world's oil. Should these countries go
to war, uncertainty regarding the level of the world's oil reserves would grow. So,
because the demand for oil would be high and the supply uncertain, country
unable to produce enough oil within its borders would be required to ensure the
storage of enough oil to cover operations. As a result, the price of oil would
increase.
Another macro-level event that affects companies and investors is the flight of
capital and devaluation of exchange rates. When a country faces the threat of
war or recession, its economy is considered uncertain. Investors attempt to turn
away their currency from unstable sources to stable ones, a country’s currency
under a threat of war may be sold and the currencies from countries without the

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threat are bought instead. An average investor probably would not get involve,
but larger institutional investors and currency futures traders would. These actions
translate into a devaluation of exchange rates.

➢ Investing Strategies for Uncertain Times

When situations of heightened uncertainty arise, the required defense is to be

well-informed as possible. Keep being updated by following day to day news that
impacts markets and doing research of individual companies. Do your analysis of
which sectors that have more to gain and lose in a crisis, and decide on a long-
term plan. Investing in gold has been a popular strategy during hard economic
times, primarily because gold has an intrinsic value.
Times of heightened uncertainty leads to great opportunities for investors who
position themselves to take advantage of it. Some investors might decide to go
on the offensive and search for companies that provide goods or services that
will lead to great returns when things turn around. It is difficult to commit capital
during uncertain times, but it can often reap huge rewards in the long run. Those
who want to mitigate uncertainty and risk might be content leaving their money
where it is or perhaps moving it to safer securities.
Diversification is always a key investing tactic and not only in times of uncertainty.
Having your investments spread across variety of assets, such as stocks, bonds,
and precious metals, helps soften the blow of one area been depreciated
quickly.
In furtherance, investing in different regions or location and in different sectors
and industries give increases diversification. For example, if you had all of your
investments in gold companies and gold prices took a dive (2016 deduction
between $1,050.00 to $1,100.00) because of an outbreak in gold mining, meaning
you are at a significant risk of loss. But now, if you also had investments in various
sectors like, technology sector and renewable energy, your portfolio would not
be impacted as much.

➢ The Bottom Line

The bottom line is, regardless of which strategy you decide to apply (if any), you
can't go wrong over the long term by keeping yourself well-informed and getting
into a position to take advantage of prices when things reverse. Being able to
keep on top of news and adjust your portfolio accordingly will help you to invest
wisely during uncertain times.

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Reference; Dr Peter Moles MA, MBA, PhD, Sources of Financial Risk and Risk Assessment, Edinburgh
business school, Heriot-Watt University.

Risk mitigation planning and monitoring

The effect strategies that come as an appropriate risk mitigation involves firstly
identifying potential risks to a project like team turnover, product failure or scope
creep and then planning for the risk by implementing strategies to help lessen or
halt the risk.

The below strategies can be used in risk mitigation planning and monitoring.

A. Assume and accept risk.

B. Avoidance of risk.
C. Controlling risk.
D. Transference of risk.
E. Watch and monitor risk.

A. Assume and accept risk

The acceptance strategy can involve collaboration between team members to

identify the possible risks of investment and whether the consequences of the
identified risks are acceptable. In addition to identifying risks and related
consequences, team members may also identify and assume the possible
vulnerabilities that risks present.

In this strategy commonly used for identifying and understanding the risks that
can affect an investment output, and the purpose of this strategy helps bring
these risks to the business’ attention so everyone working in an investment
company has a shared understanding of the risks and consequences involved.
The following example shows how the acceptance strategy can be
implemented for commonly-identified risks.

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 ➢ Risks impacting cost

The accept strategy can be used to identify risks impacting cost. For example,
investors might implement the accept strategy to identify risks to the company
budget and make plans to lower the risk of going over budget, so that all team
members are aware of the risk and possible consequences.

➢ Risks impacting schedule

This accepts strategy could help identify possible risks that could impact
scheduling, such as keeping the investment on track to meet deadlines.

➢ Risks impacting performance

These types of risks can involve performance issues like team productivity or
product performance (such as software or manufactured goods) and can be
identified and accepted as part of project planning so all members are aware
of potential performance risks.

B. Avoidance of risk

The avoidance strategy presents the accepted and assumed risks and
consequences of an investment and presents opportunities for avoiding those
accepted risks. Some methods of implementing the avoidance strategy are to
plan for risk and then to take steps to avoid it. For example, to mitigate risk on
new product production, a project team may decide to implement product
testing to avoid the risk of product failure before final production is approved.

➢ Risk to performance

Mitigation of performance risks, such as insufficient resources to perform the

work, inadequate design or poor team dynamics, can allow an investment
team to identify possible ways to avoid these types of risky situations that may
cause issues with performance. For instance, a production team might test more
durable product materials to avoid the risk of product failure with less durable
materials. Similarly, if there is performance risk within the team’s dynamics,
interactive team management can be implemented to avoid issues within the
team.

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 ➢ Risk to schedule

Avoidance of schedule implications can be implemented by identifying issues

that could come up that would affect the timeline of the project. Important
deadlines, due dates and final delivery dates can be affected by risks, such as
being overly optimistic about the timeline of a project.

The avoidance strategy can help the project team plan ways to avoid schedule
conflicts, for instance, by creating a managed schedule that illustrates specific
time allowances for planning, design, testing and retesting and making changes
as necessary. Non-working times could also be planned, so that risks to time
management can be avoided.

➢ Risk to cost

Avoiding cost issues is another implementation of this strategy. For example, a

project team may outline all anticipated costs as well as account for any costs
that could come up so that the consequences of going over budget can be
avoided.

C. Controlling risk

Team members may also implement a control strategy when mitigating risks to a
project. This strategy works by taking into account risks identified and accepted
and then taking actions to reduce or eliminate the impacts of these risks. The
following examples highlight how control methods can be implemented for risk
mitigation.

➢ Controlling risks to cost

A project team might implement control methods that can detect possible
issues with the project budget. For instance, controls for risk mitigation might
include a focus on management, the decision-making process or finding flaws
in the funding for the project before issues can arise. This can also give a project
team insight into how funds are being delegated, and if there is a risk of going
over budget, the team can identify this before it happens and take measures to
control it such as reducing spending or eliminating a resource that could prove
too costly for the project.

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 ➢ Controlling risk to schedule

Implications to scheduling can be controlled by diversifying tasks and the time it

takes to complete them among the project team. Control methods could
include tracking the time it takes to complete each task and assigning specific
tasks to team members according to the time involved with each task. The
project team might also take into account time management strategies to help
control any risk to project scheduling.

➢ Controlling risk to performance

Implementing control strategies for performance risk can include methods of

directing a team’s daily tasks, quality control methods for new products and
measures for taking action to control issues that could affect the overall
performance within a project.

D. Transference of risk

When risks are identified and taken into account, mitigating the consequences
through transference can be a viable strategy. The transference strategy works
by transferring the strain of the risk and consequences of another party. This can
present its own drawbacks, however, and when an organization implements this
risk mitigation strategy, it should be in a way that is acceptable to all parties
involved. The following example shows how and when transference strategies
are used for risk mitigation.

➢ Transference for performance

If, for instance, a production team has built a new product, but the result
presents defects. The defects may not be directly caused by issues in
production, but rather, caused by issues with materials purchased from an
outside vendor.

The product company may choose to assume the consequences and move
forward with resolution strategies—like product recall—or the company may
transfer the consequences to the outside vendor responsible for providing the
product materials by requiring the vendor to cover the costs associated with the
product defects.

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 ➢ Transference for scheduling

Sometimes a project takes longer to complete, and while this is a risk itself,
transference strategies can be used to shift the burden of being behind
schedule to the team members responsible for time management, rather than
the company as a whole. With the consequences transferred to the team
members responsible for scheduling, the production team, design team or
others can focus on completing the rest of their tasks.

➢ Transference for cost

Transference of consequences regarding cost can include holding accountants

and financial advisors accountable for issues in budgeting. For instance,
consequences for a project that goes over budget can include higher
production costs and funding for materials. If the consequences are shifted to
the finance teams responsible for tracking the budget, production managers
and team members can focus on their responsibilities while the finance team
takes measures to fix cost issues.

E. Watch and monitor risk

Monitoring projects for risks and consequences involves watching for and
identifying any changes that can affect the impact of the risk. Production teams
might use this strategy as part of a standard project review plan. Cost,
scheduling and performance or productivity are all aspects of a project that
can be monitored for risks that may come up during completion of a project.
The following example illustrates ways to monitor and evaluate risk and
consequences that can impact a project’s completion.

➢ Monitoring Cost

A finance team or budget committee can evaluate and monitor risks to cost by
creating a reporting routine to outline each expenditure of the company. This
strategy works by allowing teams to continuously assess the budget and change
any cost plans accordingly.

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 ➢ Monitoring schedule

Monitoring project schedules can include weekly updates to evaluate each

team member’s tasks and how long it takes for them to complete each task.
The team can then reassess and keep track of any issues that could risk the
project falling behind schedule. Computer software, like calendars and project
management tools, can help monitor and evaluate time management and
project schedule.

➢ Monitoring performance

Monitoring the performance of products, team members and resources used to

complete a project are all examples of ways to implement performance
monitoring. Evaluating and assessing different aspects of a company’s
performance can help mitigate risks to a decrease in performance, and tools like
productivity software can help track and evaluate performance processes within
the project. Employee performance can be monitored by planning and
implementing regular performance evaluations and product performance can
be monitored by continuous product testing and review.

Consequences of inaction if these variables are not maintained.

The Relevance: A Need for Enterprise Risk Management
The recession has forced businesses to place more focus on the management of
risks relating to all
aspects of their businesses. Such management is broadly defined as “Enterprise
Risk Management”
ERM, which describes the set of activities that businesses undertake to deal with
all the diverse risks
that face it in a holistic, strategic, integrated method. These risks include financial,
strategic,

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operational, hazardous, and compliance risks, spanning through the
organization. Many of such risks
have significant impact on the profitability, effectiveness, and reputation of
business enterprises.
Mainly in the 21st century, there are several checkpoints that have considerably
driven the need for enterprise in risk management, which are referred in todays
as drivers of ERM, which includes increase in the following;

Greater transparency (Corporate Governance)

Financial disclosures with more strict reporting and control requirement
Security and technology issues
Business continuity and disaster preparedness
Focus from rating agencies
Regulatory compliance (laws and regulations)
Globalization in a continuously competitive environment
The “what” ERM provides for Businesses which are the benefits, has been
highlighted in several publications, but as such any manger would say, “this is not
enough; anyone could lay claims that lofty”.
The “how” is the achieved that these critics are interested in knowing, now that it
has caught their attention.
They need very good reasons, why they should apply such a process looking at
its associated cost and
effect on the bottom-line of their businesses or investments. The “how” is the links
to the process of ERM to the benefits it actually tents to give. This explanation may
very well be the incentive that businesses or
managements need to implement the ERM process towards realizing, with
reasonable assurance, their strategic objects.

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Reference; Thomas A. Stewart, (2000) cited in Thomas L. Barton, et al (2002) Making Enterprise Risk
Management Pay off. Dan Borge cited in Vedpuriswar A V (2006) Enterprise Risk Management. Industry
Experience (Peter Drucker cited in Vedpuriswar, 2006), Vedpuriswar A V (2006) Enterprise Risk
Management: Industry Experience 12 Monahan, G. (2008)

Conclusion
In conclusion risk management and mitigation is key in the framework of IFM. It’s
interested to know that the application of risk measures helps companies or
individual investors to navigate and explore the world of business successfully.

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