VARIOUS TYPES OF RISKS

Overview
Under conditions of perfect competition, increase in an entity's risk should result in an increase in expected return. Under similar circumstances, a risky investment would not be pursued if a lower risk alternative provides the same reward. Therefore, controlled and uncontrolled transactions and entities are not comparable if they do not assume similar risks and it is not possible to make appropriate adjustments for the differences in risks assumed. For the activity, ABC India and its AE is engaged in, the corresponding risks likely to affect the AEs (including the Company) are listed as under: 1. Accounts receivable risk (also called as credit risk / customer credit risk) Accounts receivable risk is the risk that a client will be unable to fulfill its obligation to pay for its purchases or services under the terms of its contract. Another component of accounts receivable risk is the cost of replacing a customer order after that client has defaulted. 2. Business risk (also called as market risk) Business risk occurs when a firm is subjected to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted customers. Business risk represents standard risk borne by any enterprise in market driven transactions. Business risk affects the ability of a company to meet short and long term financial obligations if prices and/or quantities demanded decrease.

in-transit risk. Another component of credit risk is the cost of replacing a customer order after that client has defaulted. 6. Cargo risk Cargo risk is the risk in respect of loss or damage to shipments while in custody. terms of payment. It determines the risk of under utilisation of resources and also the risk associated with under exploitation of market opportunities. 7. These risks are mainly linked to the terms of the contract such as termination of the contract.Types of risks 3. etc. 8. 5. Credit risk (also called as accounts receivable risk / customer credit risk) Credit risk is the risk that a client will be unable to fulfill its obligation to pay for its purchases or services under the terms of its contract. delivery schedule. 4. Currency risk Page 2 of 7 . Cost over-run risk Cost over-run risk arises in the cases wherein the actual costs incurred for the transaction exceed the scheduled fees. Capacity utilization risk (also called as idle capacity risk) Capacity utilization risk is the risk arising out of on bench / unutilized work force. mode of delivery. transfer of title. Contract risk Contract risk is the risk associated with entering into contracts with vendors / customers for purchase and sale of components or products.

Foreign exchange fluctuation risk Changes in currency rates can cause foreign exchange profits and losses where products. This risk moves with the possession of the goods. 13. 12. train them adequately so as to suit the requirements of the company and thereby converting them into assets of the company. resources or services are purchased in one currency and then sold in another currency. These profits or losses can also arise when there is a time lag between act of raising invoices and actual payment. 9. Development risk Development risk is the risk of success or failure of development to create valuable intangible assets for a company. which would eventually have a negative impact on the profitability of the enterprise. 10. Human resource risk (also called as manpower risk) Page 3 of 7 . There always exists a risk of trained staff leaving the organization and other factors affecting productivity and efficiency. Damage risk (mainly for cargo companies) This is the risk that the goods being moved by the Origin Company (“OC”) are damaged / lost in transit and the OC has to compensate the customer for the loss. 11.Types of risks Currency risk arises from any adverse revaluation of assets and liabilities due to fluctuation in exchange rates. Human capital risk Every organization has to employ people.

Idle capacity risk (also called as capacity utilization risk) Idle capacity risk is the risk arising out of on bench / unutilized work force. 17. 16. adverse demand conditions within the market. Market risk represents standard risk borne by any enterprise in market driven transactions. losses associated with market influences. among others.Types of risks Human resource risk is the risk of increase in the manpower turnover and also the risk of unavailability of talented and skilled manpower. 18. leakage and product damage. or the inability to develop markets or position products to service targeted customers. product obsolescence. Inventory risk Inventory risk is the risk associated with. 15. 14. Process risk The logistics business earns paper-thin operating margins and therefore can become un-competitive if its processes are not highly tuned and abreast with time. having too much or too little inventory on hand. Market risk (also called as business risk) Market risk occurs when a firm is subjected to adverse sales conditions due to either increased competition in the marketplace. Market risk affects the Page 4 of 7 . For instance a competitor may snatch all the business by offering cheaper services as a result of having a better infrastructure in place. Manpower risk (also called as human resource risk) Manpower risk is the risk arising from the unavailability of talented and skilled manpower.

Product liability risk (also called as warranty risk) Product liability is the risk associated with negligence with respect to the quality of the manufactured products. Product price risk (also called as product risk) Page 5 of 7 . this cost may have to be incurred through the repair or replacement of defective products. Operational risk Operational Risk is the risk of loss resulting in inadequate or failed internal processes. Political and economic risks This risk primarily arises on account of operating in geographical jurisdictions with unstable political regimes and unfavorable government economic policies.Types of risks ability of a company to meet short and long term financial obligations if prices and/or quantities demanded decrease. Product / Service development risk Product / Service development risk is the risk of success or failure of an effort to create valuable product / service. 23. For example. 22. people and systems or from external events. expenses incurred for the development of a new product may or may not be a successful venture. It also refers to the risk arising from data loss due to network breakdown and delay in deliveries. It refers to the risk of having to bear the cost of a claim or return of a defective product. 20. 19. Depending on warranty terms. 21.

The risk is associated to bear the cost of a claim or non-performance / under-performance of services. 24. Effectively. 28. 27. Technology Risk Technology risk arises if the market in which the company operates is sensitive to introduction of new products and technologies or the present technology is not able to produce desired results. it is the risk that a firm will not be able to sell its services for the price it originally thought it would be able to charge. Depending on terms and conditions. 25. Warranty risk (also called as product liability risk) Warranty risk is the risk associated with negligence with respect to the quality of the manufactured products. 26. Service price risk Service price risk is the risk that the value of future income streams is subject to external market prices or market rates. Service liability risk (or scheduling risk) Service liability risk is related to non-performance of services or when the company fails to perform at accepted or advertised standards under the contract. Security risk Security risk is the risk of non-recovery of interest or principal amount. it is the risk that a firm will not be able to sell products for the prices it anticipated after the product was purchased. Effectively.Types of risks Product risk is the risk that the value of future income streams is subject to external market prices or market rates. this cost may have to be incurred through correction of defective services. It refers to the risk of having to bear the cost of a claim or return of a Page 6 of 7 .

Types of risks defective product. Quality risk Quality risk is the risk that arises when the manufactured products/goods are not in accordance with the agreed terms of the parties. Page 7 of 7 . 29. Depending on warranty terms. this cost may have to be incurred through the repair or replacement of defective products.

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