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POBLADOR, Diana Grace C.


Risk Management
- systematic process of understanding, evaluating and addressing those risk to maximize
chances of objective individuals and communication sustainability.
- the forecasting and evaluation of financial risks together with identification of procedures
to avoid or minimize their impacts.
- is the process of making and carrying out decisions that will minimize the adverse effects
of risk on an organization.

Different kinds of Risks

Business Risk: These types of risks are taken by business enterprises themselves in order to
maximize shareholder value and profits
Non- Business Risk: These types of risks are not under the control of firms. Risks that arise out
of political and economic imbalances can be termed as non-business risk.
Financial Risk: Financial Risk as the term suggests is the risk that involves financial loss to
firms. Financial risk generally arises due to instability and losses in the financial market caused
by movements in stock prices, currencies, interest rates and more.
Market Risk: The risk that the value of your investment will decline as a result of market
conditions. This type of risk is primarily associated with stocks. You might buy the stock of a
promising or successful company only to have its market value fall with a generally falling stock
Interest Rate Risk: The risk caused by changes in the general level of interest rates in the
marketplace. This type of risk is most apparent in the bond market because bonds are issued at
specific interest rates. Generally, a rise in interest rates will cause a decline in market prices of
existing bonds, while a decline in interest rates tends to cause bond prices to rise.
Inflation or Purchasing Power Risk: The risk that the return on your investment will fail to
outpace inflation. This type of risk is most closely associated with cash/stable value investments.
Thus, although you may think a traditional bank savings account is relatively risk free, you
actually could be losing purchasing power unless the interest rate on the account exceeds the
current rate of inflation.
Systematic Risk: Systematic risk is due to the influence of external factors on an organization.
Such factors are normally uncontrollable from an organization's point of view
Interest Rate Risk: Interest-rate risk arises due to variability in the interest rates from time to
time. It particularly affects debt securities as they carry the fixed rate of interest.

Unsystematic Risk: Unsystematic risk is due to the influence of internal factors prevailing
within an organization. Such factors are normally controllable from an organization's point of

Business Risk: Business risk is also known as liquidity risk. It is so, since it emanates
(originates) from the sale and purchase of securities affected by business cycles, technological
changes, etc.
Exchange Rate Risk: also called as exposure rate risk. It is a form of financial risk that arises
from a potential change seen in the exchange rate of one country's currency in relation to another
country's currency and vice-versa.
Recovery Rate Risk: often neglected aspect of a credit-risk analysis. The recovery rate is
normally needed to be evaluated.
Sovereign Risk: Sovereign risk is associated with the government. Here, a government is unable
to meet its loan obligations, reneging (to break a promise) on loans it guarantees, etc.
Settlement Risk: exists when counter party does not deliver a security or its value in cash as per
the agreement of trade or business.
Operational Risks: are business process risks failing due to human errors. This risk will change
from industry to industry. It occurs due to breakdowns in the internal procedures, people, policies
and systems.
Model Risk: is involved in using various models to value financial securities. It is due to
probability of loss resulting from the weaknesses in the financial-model used in assessing and
managing a risk.
People Risk: arises when people do not follow the organizations procedures, practices and/or
rules. That is, they deviate from their expected behavior.
Legal Risk: arises when parties are not lawfully competent to enter an agreement among
themselves. Furthermore, this relates to the regulatory-risk, where a transaction could conflict
with a government policy or particular legislation (law) might be amended in the future with
retrospective effect.
Political Risk: occurs due to changes in government policies. Such changes may have an
unfavorable impact on an investor. It is especially prevalent in the third-world countries.
Credit Risk or Default Risk: Credit risk is the risk that a company or individual will be unable
to pay the contractual interest or principal on its debt obligations.This type of risk is of particular
concern to investors who hold bonds in their portfolios.
Country risk: refers to the risk that a country wont be able to honor its financial
commitments.Country risk applies to stocks, bonds, mutual funds, options and futures that are
issued within a particular country.
Reputational Risk: loss of a companys reputation or community standing might result from
product failures, lawsuits or negative publicity. Reputations take time to build but can be lost in a
Process Risk: risky business process that could lead to project failure.

Time Risk: risks which often involve things connected to time.

Human Risk: loss of critical employees or knowledge which are connected to man power are
human risks.
Legal Risk: losses include goverment regulations and the same having an impact on the
operations of the company.
Physical Risk: are those loses of physical resources such as equipment,buildings, land etc. Due
to natural disasters or man made.

Types of Risk Management

Enterprise Risk Management
It is a strategic framework that checks the potential risks that have adverse impacts over the
enterprise.These risks could be in terms of risk related resources, product and services or the
market environment in which the enterprise operates.
Operational Risk Management
These risks arise due to the execution of the business functions of the enterprises.Enterprises
need to assess these risks and prepare action plans to meet the impact of risk.
Financial Risk Management
Minimizing exposure of a firm to market risk and credit risk using various financial
Market Risk Management
It deals with different types of market risks,such as interest rate risk,equity risk,commodity
risk, and currency risk.
Quantitative Risk Management
An effort is carried out to numerically ascertain the possibilities of the different adverse
financial circumstances to handle the degree of loss that might occur from those circumstances.
Commodity Risk Management
It handles different types of commodity risks, such as price risk,political risk,quantity risk
and cost risk.
Bank Risk Management
It deals with the handling of different types of risks faced by the banks for example Market
risk, credit risk, liquidity risk,legal risk,operational risk and reputational risk.
Non-Profit Risk Management
This is the process where risk management companies offer risj management services on a
non-profit seeking basis.
Currency Risk Management
Deals with the changes in currency prices.
Project Risk Management

Deals with the particular risks associated with the undertaking of a project.