Risk Management

RISK MANAGEMENT

Risk

Risky World Food prices spiked in 2008, riots breakout

in more than dozen countries in Africa and Asia, and in Egypt a worker feeding his family with 34$ monthly salary.

In Indonesia a village montie lost one out of five residents when hit by tsunami.

Global financial crises 53 million people will remain stuck in extreme poverty by 2015, who otherwise would not so poor.

Crimes, diseases, loss of employment, war, Terrorist attack……….. World is risky?

Risky World

Risk Risk ‘Uncertainty’ an unexpected

outcome of an event Even the most successful persons

have a bad day in their life Risk can be defined as the

combination of the probability of an event and its consequences (ISO/IEC Guide 73).

Risky worth pursuing

Risk Risk is virtually anything that threatens or

limits the ability of an organization to achieve its mission.

It can be unexpected and unpredictable events such as destruction of a building, the wiping of all your computer files, loss of funds through theft or an injury to a member.

anything can happen, that have the potential to damage your organization, cost you money, or in a worst scenario, cause your organization to close.

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A risk is ANYTHING that may affect the achievement of an organization’s objectives.

It is the UNCERTAINTY that surrounds future events and outcomes.

It is the expression of the likelihood and impact of an event with the potential to influence the achievement of an organization’s objectives.

Basic principles, concepts, definitions

Source of Risk Risk is based on the uncertainty principle

means that business decisions are subject to the changes in the business environment

constantly changing environment in which organizations exist

In Business only one thing is constant and that is change

Change is not an Event it’s a process that is continuous

Uncertain environment constitutes Customers Technology Govt Regulation Competition

What’s Risk in Change

‘Grow or Die’ (Technology) ‘Stay Connected Stay alive’

(customers) ‘Survival of The fittest’ (Competition) ‘Adapt or Die’ (G. Regulation) The most significant risk to an

organization is the losing touch to its environment

What’s meaning of risk? Who is at risk? What’s source of risk? What’s business environment? What’s risk in change?

Nature of Change Org are living in the turbulent transition

between industrial age and information age Reengineering, revaluation, downsizing,

reinvesting and restructuring all reflect change in business environment

The uncertain environment does not change in a straight line

To know the path of change you have to understand phases of change Forming(Invent,create,try) Norming (repeat,improve,control) Fulfilling(improve quality, reinvent)

The most significant risk to an organization is the losing touch to its environment

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Basic Concepts

Risky World

In recent years the world have suffered a multitude of crises, financial and economic turmoil have disrupted the world economy through loss of income, jobs, social instability. Natural disasters have devastated entire communities from haiti to japan, there is a trail of fatalities leaving behind a question.

How can we become more resilient to such risks?

Risky World

An other concern is missed development opportunities that arise when necessary risks are not taken.

Inability to mange risk to leads to crises and missed opportunities, risk management calls for people from crises fighters to risk managers.

Risk comes from change…. BUT Solution is not to reject it but to be well

prepared

Risk Effects Risk can effect positively or

negatively, we cal positive effect as opportunity(up side Risk) and negative effect as threat(downside risk).

Risk if ignored can be turn into crises if well managed can be an opportunity

Risk bears some cost in shape of losses if its not managed and it also have some management cost.

Risk can be reduced if not eliminated.

Risk Types

Financial risk Operational Risk Strategic Risk Hazard Risk

Strategic Risks

External Risk Competition

MNC’s vs local Reputatation risk

Media Customer Demand Industry Change

Industry norms change, change in output/input

Internal Risk R&D

low quality products and services

Financial Risks

External Risk Interest Rate Foreign Exchange

Dollar rate effect on imports Credit

Banks credit lines,renewl,reschedule

Internal Risk Liquidity &Cash flow Credit

Non payment by customers

Operational Risks

External Risk Regulation

Compliance risk in Govt rules, taxes introduction of new health and safety legislation

Culture West facing in china

Internal Risk Information System

IT having Flaws, customers see you as unreliable, IT system causes loss of all data.

Supply chain interruptions to your supply chain, reliance on one supplier

Hazard Risks

External Risk Natural Events

Flood, Earthquake, Natural Disaster,

Political and Economical Law and order, Economy slow down, Govt

Destabilization

Internal Risk Properties

Damage to property stock, building,Business inturuptions

Employees Strikes,intruption to production, customer service,Crime

Speculative Risk(Business Risk)

Most business decisions, such as marketing a new product, involve speculative risk.

speculative risk risk that is inherent to a business, involving the chance of either profit or loss

Pure Risk(Hazard Risk)

A natural disaster, such as a flood, or an accident involving a customer or an employee is a pure risk for a business owner.

pure risk the threat of a loss to a business without any possibility of gain, such as robbery or employee theft

The bank call centre

The managers at the call centre of a big commercial bank are reviewing the risks facing the business in the coming year. One issue is that the centre has always had high staff turnover, which is thought to be a result of low pay and demanding shift patterns, along with the high number of similar jobs being offered by other employers in the area.

Highlight Risks

The bank call centre

High staff turnover, low pay and demanding shift patterns, similar jobs being offered Training; It takes about two weeks to familiarize

new recruits with the bank’s product range and IT systems

aware of the processes required for dealing with customers

heavily regulated industry. Reputation Risk Training cost End up with unsatisfied customers(leaving) and

poorly trained, low paid demorale employees(leaving).

Risk Terms

Risk appetite This is the amount of risk an organisation is

willing to accept in pursuit of value. It is directly related to an organisation's strategy and may be expressed as the acceptable balance between growth, risk and return.

Risk culture This is the set of shared attitudes, values and

practices that characterise how an entity considers risk in its daily activities. Risk culture is mainly derived from an analysis of organisational practices, namely rewards or sanctions for risk-taking or risk-avoiding behaviour.

Risk Nature

Risk in the form of uncertain changes in the environment can effect the assets or the management process

The effect of risk also depend upon the types of assets involved and nature of management controls

The assets at risk can be; Human Physical Financial intangible

Risk Nature

Org. Goals

Mgt. Controls

Organization Assets

Risks

ICMAP Mission

Risk Nature

risk involves uncertainty about meeting organizational goals

The only tangible outcome of risk is its consequences we can not see intangibles that are risks

Risk is risk neither good nor bad but its consequences

Consequences depend upon Assets at risk Type of threat Duration of its consequences Controls effectiveness

Risk Nature Risk is a measure of uncertainty on the conditions

of environment, management focuses on consequences of risk

The key to risk assessment lies in the chain of goals and objectives that saturate The organization

Management control system plays an important role in perception of risk, controls minimize consequences of risk and not risk

There are no practical methods for making uncertain events more certain

The management of risk follows the assessment as treatment follows the diagnosis

The management of risk is the essence of management

Risk Analysis It’s a decision making tool for

considering the consequences of alternatives

Why Risk Analysis? To take decisions in business To allocate resources to different projects

Risk analysis include risk assessment and risk management

Risk Assessment is understanding risk and risk management is doing some thing about risk

Risk Analysis Risk Analysis t is a process of thinking

systematically about all possible risks,problems or disasters before they happen and setting up procedures that will avoid the risk, or minimise its impact, or cope with its impact.

It is basically setting up a process where you can identify the risk and set up a strategy to control or deal with it.

Risk Analysis Case study CEO of hexon Organization had to take

a decision, Org in a growth phase and want more space for extended operations, Alternatives

Purchase adjacent land Build an additional facility Build a new building large enough to

handle all operation and sell older one Lease additional facility

Risk Analysis Case study Risk ,uncertainties; External

Market demand(Major) Interest rate Political Risk Compliance risk

What decision can be made Postponing Or taking an alternative of building or Short term arrangements

Who should be involved Every one concerned in his area

Risk assessment and Management

Risk assessment and Management

Risk management is about taking risk knowingly, not unwittingly.”

Risk assessment is a method of identifying and measuring Risk

Risk Management is taking action to minimize Risk

Good risk management is not just about avoiding value destruction - it is also about facilitating value creation.

Risk assessment and Risk Management are tools to help us to understand and solve the problem

Risk assessment

Strategic; conducted for a period of 5 to 10 years by senior management, it includes identification, measurement and prioritization

Project /program/process; use to mange the current period activity , its blend of both strategic and operational

Operational ; used in every day operations largely for health and safety issue, deals with work place risks

Risk assessment

Strategic

Project

Operational

Risk Assessment

Risk Management

Risk Management

Diversify or Avoid the Risk: changing the nature of the activity to spread the exposure over multiple activities

Sharing the Risk: it’s a form of diversification in which risk can be shared with customers, suppliers, or Banks (like Insurance)

Contingency Planning establishing controls for known risks (DRP) Disaster recovery plan

Risk Assessment & Management Risk management process that helps ensure the financial stability and safe operation of an organization. It involves answering three interrelated questions:

1. What are the most significant risks that the organization faces;

2. how are they likely to arise or occur;3. and what can be done about them

either to minimize their potential impact, or otherwise to make proper provision for them?

Risk Assessment & Management Risk assessment and risk management are imprecise tools so we should not expect too much from risk analysis

As Complete security can not b provided so the risks can not be eliminated completely, however key to Risk Management is to insure all the known risks and get a right mix of plans overtime that help you to achieve your goals

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The Cyclist and the Risk Manager

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Identify risks that the cyclists faces in cycling to work.

Report back.

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Identify risks that the cyclists faces in cycling to work.

Report back.

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RisksThreats: Death Head Injury Injury Reputation Financial Damage to the bike Sunburn/frost bite

Opportunities: Exercise Sunlight Reputation Financial Role model Environment

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Mitigation Strategies for threats

Death, head injury, other injury – helmet, bright clothes, lights, bell, CANbike course, obeying traffic

laws, positive attitude, anger management course

Reputation – great outfit, change of wrinkle-free clothes, shower, time

management

Financial – high quality locks,stopping at stop signs

Damage to the bike – regular maintenance, avoiding pot holes

Sunburn/frost bite – sunscreen, mittens, hats, token/change

Dehydration- filled water bottle

High risks in Industry The risks of damage to reputation, brand,

and image; network, privacy, and security risks; loss of intellectual property; potential changes in corporate governance, regulatory and legal environment; and fluctuations in economic conditions, were all found to be the top risks in all the sectors of the industry.

High risk with entities that are victim of cyber crime, Banks do not have fraud detection systems that can detect and alert business owners to suspicious or unusual activity in their bank accounts.

Risk Assessment Every entity faces a variety of risks from

external and internal sources that must be assessed. A precondition to risk assessment is establishment of objectives, linked at different levels and internally consistent. Risk assessment is the identification and analysis of relevant risks to achievement of objectives, forming a basis for determining how the risks should be managed.

Because economic, industry, regulatory and operating conditions will continue to change, mechanisms are needed to identify and deal with the special risks associated with change.

Risk Assessment It’s the quantitative and qualitative

evaluation of exposures arising from some activity Risk Identification:

the identification and the classification of what the risk are and their characteristics.

Risk Measurement and Evaluation: the measurement of possible consequences

Risk Prioritization: how the risks are related to each other

Process of risk assessment1. Gain an understanding of the organization's

overall goals Examine documents i.e mission statement Classify into time span of short medium and long term

2. Choose the risks that important to Org. Operational Financial Strategic

3. Define the environment that are important to org. Technology Customer Competitor Economical Financial

Process of risk assessment4. Create a series of matrices5. Using various creative process such

as brain storming, imagine scenarios out of box, may out sourcing.

6. Combine the risk assessment for various goals and objectives. Based on the assessment management can plan how to deal with those risks.

Project risk assessment

Project risk assessment uses a different method to identify risk may use one of the following methods

Exposure analysis; assets involved Environmental analysis; change in

environment Threat scenarios; what is. What

might happen

Project Risk assessment

Identify Risks

Alternatives/ Risk vs Cost

Design Controls

Monitor Risks

Project risk assessment procedure

a) Identify risk; with mentioned approaches

b) Measure Risk/ develop alternatives; measure risk on score scales with different approaches and price out alternatives

c) Control design; choose cost effective controls

d) Risk management; monitor risks and hazards making adjustment to project

Risk Identification

Risks are an everyday part of life, so organisations need a system to identify all those they face. This involves collecting information from a variety of sources: individuals, reports, observation and environmental

assessments. Common methods of collecting data that identify risks include workshops, scenarios, brainstorming and

surveys. These may be linked with consultations with stakeholders, environmental analyses, strategic plans etc.

Risk Identification Risk identification is a key process of Risk

assessment. Risk can not measured, prioritized or managed unless identified

Risk identification sets out to identify an organization's exposure to uncertainty, it requires an intimate knowledge of the organization, the market in which it operates,

the legal, social, political and cultural environment in which it exists, as well as the development of a sound understanding of its strategic and operational objectives,

factors critical to its success and the threats and opportunities related to the achievement of these objectives.

Approaches to identify risk

Exposure Analysis: Managers put physical, financial, human assets at risk to achieve Org. objectives.

• Identification of risks that can effect assets that are critical for any Org. Matrices are created

• Exposure analysis is suitable for asset intensive industries like manufacturing and construction industry

• STPL Size Type portability and location Approach is used.

Risk Identification approaches

Environmental Analysis: the organizations environment constitutes Customer, competitor, economic, Govt Regulations

• the identification of environment risks that could effect organization’s operations

• PEST -- A high level technique to understand the external environment affecting the industry and some of the specific external factors that may affect the business. It considers Political, Economic, Social and Technological factors and the risks to the business that flow from these.

• Suitable for service industry like phone companies

PEST


Threat Scenarios: specialized risk identification for frauds and disasters

• This approach not frequently used like the above two mentioned Because of time and skills required

• Its always documented and time specific process and its record must keep secure


Five Forces analysis This technique considers all the forces that influence the company, its industry and its market place. It helps to analyse why a business is successful or not. The five forces are the threat of new entrants, threat of substitute products or services, the bargaining power of suppliers and buyers, the competitors and the intensity of rivalry in the industry.

Facilitated methods (eg, brain storming) have the advantage of drawing upon those experienced in risk assessment, whilst maximising the input of management who should know the business best.

Risk Measurement Assess Risk impact. Once the risks have been

identified, some assessment needs to be made of their likely impact. This involves quantifying the risk in some way. We might conduct market surveys, computer simulations, cost-benefit analyses, or apply probabilities, statistical tests or sensitivity analysis. Alternatively, we may rely on subjective judgments.

Mathematicians prefer to measure it in quant through probability but managers measure it on qualitative scale as low medium and high

Risks are the events with some probability of occurring, consequences are results of risk

Risks and its consequences can be measured on three dimensions

1. Risk occurrence2. Severity of consequences3. The timing of risk and duration of consequences

Risk Measurement

Risk Measurement methods

1. Probability; its application of probabilities to asset values to calculate loss in numbers

The problem with that approach is some situations are difficult to measure in quant way

Take different scenarios of threats like fire, flood and assume probability of threat its duration, assets at risk and expected loss

But most mangers not prefer probability approach

Risk Measurement methods2. Risk Factors are observed; more presence of risk

factors means higher risk; Complexity Asset liquidity Management competence Control strengths

Three types of risk factors used Subjective risk factors

Integrity of management Extent of rapid changes in process

Objective risk factors Value at risk Employee turn over

Calculated risk factors Distance from office

Risk Measurement methods

Weighted matrices: its similar to using risk factors we allocate weights to different components it involve 5 step process1. Limit risk factors2. Choose a scale 1-53. Evaluate factors and assign a score4. Develop weight for each risk factors5. Multiply weight with factor score

Case study The national bank has branches all over

the country and each branch is independent in operations

Source of risk Insider loan activity Collateral verification

controls Every loan secured by collateral Employees loan reported Each collateral loan full documentation and

segregation of authorities Measure risk and allocate 20 hour budget

Case Study Branch Banking

1. Get your scenario?1. Organization type nature, size, of

business goals general/ specific.

2. Source of risk/ categorization/ types of risk , why… explain….

3. Measure/ mapping/ ranking as medium, high or low/ explain…….. Why?

4. What can be done about it… measures why explain…………..

Case Study Branch Banking1. Get your scenario?

Organization type nature, size, of business goals general/ specific. Bank, deals in money, large number of customers, Maximum profit /

fraud prevention & detection of errors

2. Source of risk/ categorization/ types of risk , why… explain… Banks are inherited with risks, Risk of fraud, liquidity risk, interest rate

risk, reputation risk, branch independent risk of abuse of authority. Risks identified relate with revenue, how they constituents total

revenue profit and risk? What are the controls there? Chances of failure of controls. Collateral value decline

3. Measure/ mapping/ ranking as medium, high or low/ explain…….. Why?

Rank the risks with your explanation which you think is comparatively high risk i.e collateral verification

4. What can be done about it… measures why explain………….. Independent Valuation of collateral Decline in collateral value, manual may subject to errors Setting limits of employee loan with respect of time and amount Insider loan Approval from H.O, disclosure in F.S

15 hour budget to Collatral verfication

Risk Prioritization Prioritization is also called ranking; purpose of

ranking is to put relative effort to the various components of the org. based on risks, place more effort on highest risks

Prioritization of identified risks, thereby enabling organizations to improve on project performance by focusing on high-priority risks.

Risk priority is identified using the probability of occurring, the impact on project objectives if realized, as well as time frame and risk tolerance of the project constraints of scope, schedule, cost and quality.

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Risk Prioritization – likelihood and impact

Likelihood of a risk event occurring Very High: Is almost certain to occur

High: Is likely to occur

Medium: Is as likely as not to occur

Low: May occur occasionally

Very Low: Unlikely to occur

Risk Impact: Level of damage that can occur when a risk event occurs

Very High: Threatens the success of the project

High: Substantial impact on time, cost or quality

Medium: Notable impact on time, cost or quality

Low: Minor impact on time, cost or quality

Very Low: Negligible impact

Methods of prioritization

Absolute ranking; ranked by score in order of magnitude

Relative ranking; ranked as high, medium, low sufficient for general planning purposes

Matrices ranking; components at left and threats at top than rank as H, M ,L

ExerciseThe finance director of xyz has to prepare an

assessment of credit risk to report on board. The company has annual credit sales of Rs. 12 Million and credit terms are 60 days.

Irrecoverable debts 1.5% of total credit sales 10 % of Irrecoverable is recovered through

legal action Required

What is credit risk exposure of the company? What is expected loss each year due to credit

risk?

Risk Management

Process of acting upon the assessment of risk is called Risk management

A prudent management will take steps to manage the risk

Risk Management includes what can be done with the assessed risks

Risk Management

Avoid the Risk: design the process to eliminate particular risks, minimize the risks or change the nature of risks

Control the Risk: introduce procedures to control the process that minimize the consequences and severity of risk occurrence. Pool Risk

Risk of different transactions pooled together Diversification

Share or Transfer the Risk: Burden of risk shared ;through contractual arrangements with suppliers, customers, banks and insurance companies.

Diversification

Diversification is an other method to control risk ‘Don’t check depth of water with both legs’ ‘Don’t put all your eggs in one basket’, spread

risk across investments Change is the source of risk; so select different

investments which change in opposite to each other, which are negatively correlated;

Investments can be from different ranges as; Different Biz sectors week economy to strong economy One country to other country Seasonal to non seasonal

Project Risk management

Risk Rieturn higher Risk Management cost higher

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risk higher

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Measure Cost of Project

Assessment for high

Risk

Risk Manageme

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mang cost

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Cost of leaving project

Risk retur

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off

Submit 4

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prove

Cost of Risk

Residual Risk

There is always an amount of risk that left instead of all your management efforts its called residual Risk

If residual risk too high than leave the project if risk not too high than accept it

Risk vs return Inherent risk, control risk, risk of

relying on procedures that can fail to detect

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Risk Management process

Risk Assessment Risk Assessment

Identify the risksIdentify the risks

Prioritize the risksPrioritize the risks

Measure the riskMeasure the risk

Manage the riskManage the risk

Benefits of Risk Management Risk management helps a company

avoid cost, disruption and unhappiness.

helps management to decide which risks are worth pursuing, and which should be shunned.

benefits of risk management are not easy to quantify as,we can’t say, two major fires, a burglary and three serious accidents prevented

Type of riskBenefits of proactive managementa) Marketing risks

b) Health & safety risks

c) Environmental risks

d) Fire risks

e) Computer

f) Theft and fraud

g) Technical

h) Product contamination

a) Maintain market share

b) Avoid worker litigation; reduce insurance premiums

c) Avoid litigation from regulatory authorities; reduced premiums

d) Avoid loss of production, avoid going out of business; reduced premiums Avoid loss of life or destruction of a building

e) risks Prevent inability to invoice, lack of access to information

f) Prevent loss of money, assets or concepts, loss of market share

g) Avoid being left behind with obsolete manufacturing methods or technologies; avoid production stoppage

h) Avoid harming customers and prevent litigation

Risk management is growing in importance Legislation getting tougher

Company directors can be jailed for corporate offences, and fines can be high for health and safety, product liability & finance issues

Insurance is more expensive and more difficult to get as Insurance companies; putting up premiums For higher risk. adding more exclusions, to the point where the

insurance won’t cover the business require their clients to actively manage their

risks. can’t pay for loss of reputation

Risk management is growing in importance Customer attitudes:

Customer less likely to accept product failure especially for drugs

Shareholders awareness of risk. information in annual reports about the company’s exposure to risk, direct affect on company’s future profits.

Management attitude• Management has learnt from other’s

disaster if want to grow globally they have to be more professional about risk

Fraud

Fraud ‘Whit Collar Crime’, cheating, dishonesty, frogery, embezzlement, insider trading, intentional deception.

Fraud definition; ‘fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving the gain’.

Fraud risk assessment; Inherent fraud risk

Business specific Culture specific

Identify three indicators; Incentive/Pressure Opportunity-control weakness Ability to rationalize

Fraud Risk management FRM required where stakeholders have

greater expectations and regulators have large penalties, Five principles of FRM;1. Governance structure

1. Defined and documented policies and procedures

2. Ethical Culture 1. apply while hiring, promoting employees2. Relationship with customers, suppliers3. Business strategy and operations

2. Fraud Risk Exposure should be assessed periodically

1. Identify indicators as mentioned in above slide

Fraud Risk management3. Feasible prevention techniques to avoid risk

event3. Strong Controls and Communication to all

concerned4. Design Edit Checks in IS5. Cameras and Alarms6. Reconciling accounts7. Employees training8. monitoring

4. Detection and Investigation3. Establish hotlines for complains of stakeholders4. Audit and Inventory count5. Investigation by independent and qualified

personnel

5. Reporting to3. BOD, Legal Authorities.

Counterparty Risk The risk to each party of a contract that the

counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract.

Counterparty risk is the potential exposure any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract’s specifications.

Counterparty risk has long been one of the major factors that favor the use of exchange-traded rather than over-the-counter derivatives.

In most financial contracts, counterparty risk is also known as "default risk".

Counterparty risk Management The recent market turmoil has reinforced the

importance of adequate risk management, including dealing with exposure to counterparties.

For a new product, the back office facilities need to be developed in order to record the trades and to keep track of the counterparties.

• Some contracts will require the counterparty party to make collateral payments on being downgraded. Does the value of the collateral also decrease?

• Assessment of credit rating that is up to date and accurate?

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Counterparty risk Management

A master agreement reduce counterparty exposure, as it allows netting. For a new product this provides an incentive to standardize the contract terms (if possible) and develop a master agreement.

A clearing house concentrates exposure – need only worry about the clearing house.

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IT risk

• Risk Management when applied to information system, this process involves identifying and assessing risks and take appropriate action to manage those risks

• Classifying Risks; risk can be categorized as to the achievement of strategic financial and operational objectives

• Ineffective system design and testing risk from inefficient operations

Political Risk

Political change that alters the probability of achieving business objectives“the risk of a strategic, financial, or personnel loss because of such nonmarket factors as macroeconomic factors (fiscal, monetary, trade, investment, industrial, income), political instability (terrorism, riots, civil war and revolution).”

Seeing negative risk is easier than finding an opportunity

http://en.wikipedia.org/wiki/Terrorism

Sources of Political Risk

Confiscation or destruction of overseas assets

Discrimination Restrictions on repatriating cash Price fixing Expropriating assets Restriction on currency conversion Import quotas Company structure Super taxes

political risk Management

Pragmatic usage of contingency planning, intellectual property safeguards, risk diversification, and sound exit planning to guard against Risk

Transfer Risk Borrow locally if foreign investment Participative management

• Share Risk Insurance Joint ventures Negotiate in advance for compensation

Control Risk Hedging diversification

Financial Risks Financial risk is a risk of change in a

financial condition such as exchange rate interest rate credit rating of a customer.

Types of Financial risk1. Credit risk2. Political risk3. Interest rate risk4. Currency risk

Credit Risk

• Credit risk is the risk of non payment or late payment of receivables.

• Due to credit sales Credit Risk is always there in business so need to be managed; Risk of default of borrower, nonpayment or

late payment Controls; Keep amounts and maturities

short Insurance Debt factoring without resource

Currency risk currency risk that arises from possible future

movements of in an exchange rate, its two way risk as exchange rate can move either adversely or favorably. Currency risk of three types

1. Transaction Risk: That is risk is associated with buying and selling in foreign currencies, there is danger that at time of transaction and at time of cash flow exchange rate will fluctuate, it will actually effect cash flow of entity.

2. Translation risk: this risk arises when a company has assets or liabilities denominated in foreign currency. The risk is the exchange rate volatility will cause the value of assets to or liabilities to increase resulting looses to the company.

3. No assets/ liabilities or transaction denominated in foreign currency but it may face economic risk as competitors may be in better position due to favorable exchange rates

Transaction Risk

A Co. purchases goods on six month credit for 150,000$ , exchange rate was 98 Rs./ 1 $. At time of transaction and expected payment?

Suppose the rate changes dollar strengths and now it is 110 Rs/ 1 $.now expected payment?

How much loss?

Transaction Risk Management

Invoice in home currency: transaction can be transferred to customer or supplier if invoice is in home currency

Leading and lagging – making a payment before its due or delaying ; used to hedge against foreign currency fluctuations, this involves changing the timing payments or receivables depending on expected change in exchange rate.

Matching – matching assets and liabilities of the same nature. For example, to hedge against foreign currency movements you would match assets and liabilities denominated in the same currency. Conversely, to protect against movements in interest rates, financing foreign investment with foreign loan.

Transaction Risk Management –Internal Hedging

Netting – Receipts and payments are netted to determine the overall exposure which then can be hedged using external techniques

Pooling; a system of managing cash separate bank balances are pooled together to minimise markup and maximize interest earned

Interest rate risk:

risk that interest rate changes will affect the financial well-being of an entity. This includes changes in interest rates adversely affecting the value and liquidity of fixed or floating rate exposures. In addition to bond prices, interest rate fluctuations also directly affect stock prices, foreign exchange rates and economic growth. Interest Rate

Effect the cost of borrowing Rise in price of funds will effect its movement Effect PV of future cash flows Controls; Diversification

Management

Smoothing – used for interest rate risk management, this involves maintaining a balance between fixed and floating rate debt.

Matching –To protect against movements in interest rates, you would match assets and liabilities having a common interest rate.

Management

Leading and lagging – used to hedge against foreign currency fluctuations, this involves changing the timing payments or receivables depending on changes in foreign currencies.

Netting – assets and liabilities are netted to determine the overall exposure which then can be hedged using external techniques

Management

Manage the risk using external (derivative) hedging techniques such as the use of derivatives (forwards, futures, options, swaps and hybrids of these). This is usually the responsibility of the treasury department.

Risk Management Case Studies

Presentation1. Airline 2. Automotive Retail 3. Healthcare 4. Manufacturing 5. Mining 6. Retail 7. Software 8. Wholesale