Financial Risk Management

E1 – Finance

UNIT-1
 Concept of risk
• Risk is virtually anything that threatens or limits
the ability of a community or non profit
organization to achieve its mission.
• There always exist a difference between the
expected and actual returns. The difference is
termed as “risk”.
• Risk is of two types:
• When probability is certain.
• When probability is uncertain.
 Nature and Scope of risk
• Funds mobilization.
• Funds Deployment.
• Funds transfer.
• Risk transfer.
• Transaction services.
• Credit enhancement services.
 Sources of Risk

• Government policies related to prices.

• Consumer preference, Consumption and
savings.
• Political, Social and Ethnimic issues.
• Technological factors.
• Corporate Goverence and financial
performance and financial structure adopted
by the firm.
 Firm Facing Market Risk
• Price level Risk.
• Foreign exchange rate risk.
• Interest rate risk.
• Correlation and concentration Risk.
• Dividend and stock loan risk.
• Price volatility risk.
• Price correlation risk.
 Measurement of risk
• Sensitivity analysis.
• Probability(Distribution).
• Standard deviation.
• Coefficient of variation
 Risk Identification process
• The project management plan.
• Risk management plan.
a. Assignment of roles and responsibilities.
b. Budget provisions for risk management activities.
c. Schedule for risk management.
• Project scope statement.
• Organizational process assets.
• Enterprise environmental factors.
 Tools and Techniques for Risk Identification
process
• Documentation reviews.
• Information gathering techniques
 Brain storming
 Delphi technique
 Interviewing
 Root cause identification
 SWOT analysis.
• Checklist analysis
• Assumptions analysis.
• Diagramming Techniques.
Classification of risk Identification
A. Identifying Business risk exposure
1. Property losses
• Actual cash value
• Replacement cost
• Types of property losses exposure
a. Direct loss
b. Indirect loss
c. Net income loss
d. Decrease in revenues
• Loss of rent
• Interruption in operations.
• Contingent business interruption.
e. Increase in expenses
2. Liability losses
• Criminal liability.
• Civil liability.
• Types of liability losses exposure
a. Arises from ownership.
b. Arises from manufacturing.
c. Arises from fiduciary relations.
d. Employers liability
3. Personnel losses
4. Losses from external economic forces.
B. Identifying Individual Loss Exposure
• Personnel loss exposure.
• Property loss exposure.
• Liability loss exposure.
 Types of risk
• Interest rate risk.
• Market risk.
• Inflation risk.
• Business risk.
• Financial risk.
• Liquidity risk.
• Exchange rate risk.
• Political risk
 Degree of risk

• Pure and speculative risk.

• Acceptable risk and Non acceptable risk.
• Static and dynamic.
 Product and Capital Market Risk
Product market risk
• Product market risk faced by firms new products
and services offered in the market.
• Degree of risk is high and cannot be predicted
easily.
Capital market risk
• The risk associated with an investment in capital
market
• Degree of risk is low and can be predicted.
Possible risk events and indicators
• Essential for the organization to identify such
events as they have a direct impact.
• Risk event is identified independently.
• Problems associated with the measurement of
risk events with regard to methods & techniques
of risk evaluation should be considered.
• Creation of a map with organizations value chain
and taxonomy of categories.
 Risk management
• A technique for constantly monitoring and
evaluating an investment and its risks is called
risk management.
Activities of Risk Management
• Identification of risk.
• Measuring risk.
• Managing
Steps in Risk Management process

• Defining the objectives of risk management.

• Identifying potential losses.
• Evaluating the potential losses.
• Selecting appropriate techniques for losses.
• Implementing & reviewing the programme.
 Pre-Requisites and Fundamentals
• Security policies and standards.
• Information resources Inventory.
• Security Liaisons.
• Enterprise Risk Committee.
• Mapping of risk dimensions to business
objectives.
• Other security processes tied to risk.
• Risk and exception tracking system.
 Misconceptions of Risk

• Universal Applicability.
• Anti-Insurance Bias.
 Integrated approach to Corporate
Management
• Board level participation.
• Risk management structure of an organization.
• Risk profile.
• Incorporating risk as an important element of an
organization.
• Risk reporting.
• Risk culture.
• Open communication.
• Risk management training.
• Front office compensation
 Risk management methods
• Avoidance of risk.
• Loss control.
i. Loss prevention.
ii. Loss reduction.
• Risk retention.
• Non-insurance transfers.
• Insurance.
 A comprehensive view of risk in financial
institutions
• Internal environment.
• Strategy and objective definitions.
• Risk assessments.
• Risk response.
a. Treating a risk
b. Termination of risk.
c. Transfer of risk.
d. Take a risk
• Control activities.
• Information & communication.
• Monitoring
Risk reporting process-Internal & External

• Internal reporting.
• Time period.
• External reporting
• Independent risk oversight
 Characteristics of a Good Risk Report

• Reports must be timely.

• Accuracy.
• Must focus on risky areas.
• Written summary of daily reports.
• Risk report needs to be concise.