Risk types
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This document discusses various types of risks including: - Market risk, strategic risk, sales risk, management risk, and budget risk as types of business risks. - Systematic risk and unsystematic risk. - Inflation risk, exchange rate risk, interest rate risk, liquidity risk, maturity risk, credit risk, and political risk. It provides definitions and explanations of these risks. The document also outlines a process for risk management including identifying risks, analyzing them, ranking them, and developing contingency plans for high probability/high impact risks.
Risk types
- 2. Risk provides the basis for opportunity. Risk refers to the probability of loss, while exposure is the possibility of loss. So; Risk arises as a result of exposure.
- 3. In a global market place, there are many opportunities for risk. Losses may not be limited to one geographical or domestic market.
- 4. 4 A risk is a potential problem – it might happen and it might not Conceptual definition of risk • Risk concerns future happenings • Risk involves change in mind, opinion, actions, places, etc. • Risk involves choice and the uncertainty that choice entails Two characteristics of risk • Uncertainty – the risk may or may not happen, that is, there are no 100% risks (those, instead, are called constraints) • Loss – the risk becomes a reality and unwanted consequences or losses occur
- 5. Many risk management initiatives such as credit risk, settlement and payment system initiatives have been introduced by or for financial institutions. Several major international initiatives have been undertaken to reduce financial risk and systemic risk.
- 7. Inflation risk Inflation risk is that the real return on a security may be less than the nominal return In case of fixed income securities Inflation risk is also known as Purchasing power Risk Exchange rate Risk Indirect risk involved in foreign exchange fluctuations. “Currency risk arises due to uncertainty in exchange rates”.
- 8. Business Risk As a holder of corporate securities (shares and debentures), large population is exposed to the risk of poor partners performance. Political Risk Political risk may be defined as the probability that a political event will impact adversely on a firm’s profit
- 9. Sub-categories of Business risks • Market risk – building an excellent product or system that no one really wants • Strategic risk – building a product that no longer fits into the overall business strategy for the company • Sales risk – building a product that the sales force doesn't understand how to sell • Management risk – losing the support of senior management due to a change in focus or a change in people • Budget risk – losing budgetary or personnel commitment
- 10. Interest Rate Risk Interest Rate Risk is the risk that the relative value of a security, especially bond, will worsen due to an interest rate increase.This risk is commonly measured b the bond's duratio
- 11. Liquidity Risk 1.A temporary inability to convert assets to cash 2.Operational difficulties of various kinds 3.The inability of correspondents to perform settlement functions Maturity Risk: IT IS TOTALLY DEPEND ON MATURITY PERIOD RELATED TO ANY TRANSACTION:
- 12. Credit exposure exists within most organizations, but it is especially significant major financial institutions. One of the most fundemental aspect of credit risk management is the careful selection of counterparty.
- 13. 13 1) Identify possible risks; recognize what can go wrong 2) Analyze each risk to estimate the probability that it will occur and the impact (i.e., damage) that it will do if it does occur 3) Rank the risks by probability and impact - Impact may be negligible, marginal, critical, and catastrophic 4) Develop a contingency plan to manage those risks having high probability and high impact
- 14. I CONCLUDE THAT RISK IS ALWAYS A DANDEROUS FACTOR IN BUSINESS BUT AT SOME TIMES BY TAKING RISK LEADS TO SUCCESS ALSO ALL WOULD HAPPEN BASING ON EXPERIENCE.