Introduction 

 The origin of term of the word “RISK” can be traced to the latin word “RESCUM ” meaning of danger at sea or that which cuts.  A modern business is confronted with many risks, some of which are basic e.g.; loss of property due to natural calamities, civil unrest etc.  And some strategic exposure to change in foreign exchanges rates or interest or commodity prices impacting the expected value or the real cash flows of the firm.

Introduction 
 The purpose of risk management is not necessarily to avoid risk altogether; complete elimination of risk is not possible.  Instead the purpose of risk management is to identify which risk are relevant and in what amount. That helps us devising suitable strategies to handle relevant risks.

Meaning of risk 
 The possibility of suffering harm or loss; danger.  The possibility of incurring misfortune or loss; hazard

Risk Management Concept 
 Risk management is one of the specialized functions of general management. As such, risk management shares many of the characteristics of general management, and yet is unique in several important respects.  Management may be defined as the process of planning, organization, directing and controlling the resources and activities of an organization in order to fulfill the objective of that organization at the least possible cost.

Risk Management Concept 
 Risk management fits within one corner of this broad definition-the corner which is devoted to minimizing the adverse effects which accidental losses and price/rate volatilities may have on the organization.  In order to fulfill its more ambitious objective of profit its more ambitious objective of profit, growth or public services, an organization must first achieve a more basic goal. Survival in the face potential losses, “ risk management” may be defined as the process of planning, organization, directing and controlling the resources and actives of an organization in order to minimize the adverse effects of potential losses at the least possible cost.

Risk Management Objectives


 Though it may be difficult to outline specific targets for risk management, some broad objective included: • Mere survival, • Peace of mind, • Lower risk management costs and thus higher profits, • Fairly stable earnings, • Little or no interruption of operations, • Continued growth, • Satisfaction of the firm’s sense of social responsibility desire for a good image etc.

Types Risk

 COMMON RISK IN FINANCE :
Unfortunately, the concept of risk is not a simple concept in finance. There are many different types of risk identified and some types are relatively more or relatively less important in different situations and applications. In some theoretical models of economic or financial processes, for example, some types of risks or even all risk may be entirely eliminated. For the practitioner operating in the real world, however, risk can never be entirely eliminated. It is ever-present and must be identified and dealt with.

Types Risk
types of risk the has been identified. It is important to remember, however, that all types of risks exhibit the same positive risk-return relationship. Some of the most important types of risk are defined below. o Default risk o Interest rate risk 1. Price risk 2. Reinvestment risk o Liquidity risk

 are a number of different In the study of finance, there

Types Risk

 risk) o Inflation risk ( purchasing power
Market risk Firm specific risk Project risk Financial risk Business risk Foreign exchange risk 1. Translation risk 2. Transaction risk o Total risk o o o o o o

Default risk

 the payment of financial  The uncertainty associated with

obligations when they come due. Put simply, the risk of non-payment.  The event in which companies or individuals will be unable to make the required payments on their debt obligations. Lenders and investors are exposed to default risk in virtually all forms of credit extensions. To mitigate the impact of default risk, lenders often charge rates of return that correspond the debtor's level of default risk. The higher the risk, the higher the required return, and vice versa.

Interest rate risk

market interest rates. • There are two types of interest rate risk identified; price risk and reinvestment rate risk. • The price risk is sometimes referred to as maturity risk since the greater the maturity of an investment, the greater the change in price for a given change in interest rates. • Both types of interest rate risks are important in banking and are addressed extensively in Bank Management classes.

 the effects of changes in The uncertainty associated with

Interest Rate risk
• Price Risk The uncertainty associated with potential changes in the price of an asset caused by changes in interest rate levels and rates of return in the economy. This risk occurs because changes in interest rates affect changes in discount rates which, in turn, affect the present value of future cash flows. The relationship is an inverse relationship. If interest rates (and discount rates) rise, prices fall. The reverse is also true. Interest rate
Interest rates

Present value
Present value

Since interest rates directly affect discount rates and present values of future cash flows represent underlying economic value, we have the following relationships.

Interest Rate Risk
• Reinvestment Risk The uncertainty associated with the impact that changing interest rates have on available rates of return when reinvesting cash flows received from an earlier investment. It is a direct or positive relationship

Interest rate Interest rate

present value present value

Liquidity Risk 
 The uncertainty associated with the ability to sell an asset on short notice without loss of value. A highly liquid asset can be sold for fair value on short notice. This is because there are many interested buyers and sellers in the market. An illiquid asset is hard to sell because there few interested buyers.

Inflation risk 
 The loss of purchasing power due to the effects of inflation. When inflation is present, the currency loses it's value due to the rising price level in the economy. The higher the inflation rate, the faster the money loses its value.

Market Price Risk 
 Within the context of the Capital Asset Pricing Model (CAPM), the economy wide uncertainty that all assets are exposed to and cannot be diversified away. Often referred to as systematic risk, beta risk, non-diversifiable risk, or the risk of the market portfolio.

Firm Specific Risk 
 The uncertainty associated with the returns generated from investing in an individual firm’s common stock. Within the context of the Capital Asset Pricing Model (CAPM), this is the investment risk that is eliminated through the holding of a well diversified portfolio. Often referred to as un-systematic risk or diversifiable risk.

Project Risk 
 In the advanced capital budgeting topics, the total risk associated with an investment project. Sometimes referred to as stand-alone project risk. In advanced capital budgeting, project risk is partitioned into systematic and unsystematic project risk.

Business Risk 
 The uncertainty associated with a business firm's operating environment and reflected in the variability of earnings before interest and taxes (EBIT). Since this earnings measure has not had financing expenses removed, it reflect the risk associated with business operations rather than methods of debt financing.

Foreign Exchange Risk 
Uncertainty that is associated with potential changes in the foreign exchange value of a currency. There are two major types: translation risk and transaction risks. Translation Risks: Uncertainty associated with the translation of foreign currency denominated accounting statements into the home currency. Transactions Risks: Uncertainty associated with the home currency values of transactions that may be affected by changes in foreign currency values.. 

Total Risk 
 While there are many different types of specific risk, we said earlier that in the most general sense, risk is the possibility of experiencing an outcome that is different from what is expected. If we focus on this definition of risk, we can define what is referred to as total risk. In financial terms, this total risk reflects the variability of returns from some type of financial investment.

Types of risk facing business and individuals
 BUSINESS RISK :

 Broadly defined risk management is concerned with possible reductions in business value from any source.  Business value to shareholders, as reflected in the value firm’s common stock, depends fundamentally on the expected size, timing, and risk ( variability) associated with the firms future net cash flows (cash inflow less cash out flows) .  Unexpected changes in expected future net cash flows are a major source of fluctuation in business value.  in particular, unexpected reductions in cash inflows or increases in cash outflows can significantly reduce business value

Types of risk facing business and individuals
cash flows and business value are price risk, credit risk and pure risk. Price risk: Refers to uncertainty over the magnitude of cash flows due to possible changes in output and input prices Output prices risk refers to the risk of changes in the price that a firm can demand for its goods and services. Input price risk refers to the risk of changes in the prices that a firm must pay for labor, materials, and other inputs to its production process.

 give rise to variation in The major business risks that

 Three specific types of price risk are

Types of risk facing business and individuals

 commodity price risk,  exchange rate risk  interest rate risk. Commodity price risk arises from fluctuation in the prices of commodities, such as coal, copper, oil, gas and electricity, that are inputs for some firm and outputs for others. Due to globalization economic activity, output and input and prices for many firms also are effected by fluctuations in foreign exchange rates.

fluctuate due to changes in Out put and inputs price also can

Types of risk facing business and individuals

interest rate. Credit risk: The risk that a firm’s customers and the parties to which it has lent money will delay or fail to make promised payment is known as credit risk. Pure Risk A risk that is not beneficial to the insurer, as loss is the only foreseeable outcome.

Types of risk facing business and individuals
Pure risk The risk management function in medium-to-large corporation ( and the term risk management) has traditionally focused on the management of what is know as pure risk. Major types of pure risk that affect businesses are as follows. o The risk of reduction in value of business assets due to physical damages, theft and expropriation ( i.e., seizure of assets by foreign governments). o The risk of legal liability for damages for harm to customers, suppliers, shareholders, and other parties.

Types of risk facing business and individuals
• The risk associated with paying benefits to injured workers under workers compensation laws and the risk of legal liability for injuries or other harms to employees that are not governed by workers’ compensation laws. Personal risk :

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