BF3329: Risk

Management
Week 2: How to deal with risk (assessment and early
mitigation)

Readings: Chapters 3, 6 & 12 of Hopkins,

Fundamentals of Risk Management. (Chapter 15
optional)

3/10/19
Conclusions from last w eek

• Risk-taking is fundamental to business and entrepreneurship.

It can be positive or negative
• Risk can be managed to meet different objectives:
– Mandatory
– Assurance
– Decision-making
– Effective and efficient core processes
• Principles of risk management are that it is:
– Proportionate
– Aligned
– Comprehensive
– Embedded
– Dynamic
Lecture content

By the end of this session you will be able to:

 Understand the process of risk management
 Understand the key components of risk assessment
 Recognise strategic risk responses to opportunities and
threats
 Discuss strategic responses to risk through tools such as
insurance, forward contracts, futures
 Discuss the role of internal control in risk management
implementation
 Be introduced to the case study which underpins the
course work/assessment
 The Risk Management Process

AIRMIC, ALARM, & IRM, 2002, p.4

O r g a n i s a t i o n a l o b j e c t i ve s
• Use of
Necessary
Conditions
• To inform critical
success factors
• To ensure a
successful risk
assessment
•Questionnaires and checklists
•Workshops and brainstorming (E.g.
SWOT/PESTLE)
•Inspections and audits
•Flow charts &
dependency analysis
Moving from inherent to target risk level

Target/residual
Inherent risk Mitigation
risk

• Tolerate if low-likelihood/low-consequence
• Treat if high-likelihood/low-consequence
• Transfer if low-likelihood/high-consequence
• Terminate if high-likelihood/high consequence
Strategic Risk Responses (1)

High potential reward

Exploit
opportunity until Expand
competitors (depending on
arrive risk appetite
and capacity)

Low risk High risk

Exist in
Explore
mature/
entrepreneurial
declining
opportunities
markets

Low potential reward

Hopkin 2017, p. 183
Strategic Risk Responses (2)

High potential reward

Exit if risk
appetite
Exploit exceeded
opportunity until Expand
competitors (depending on
arrive risk appetite
and capacity)

Low risk High risk

Exist in
Explore
mature/
entrepreneurial
declining
opportunities
markets

Low potential reward Hopkin 2017, p. 184

Risk control techniques

High consequence

Transfer risk to Terminate

another party. activity
Dominant type of generating the
controls will be risk. Dominant
Directive type of controls
will be
Preventive
Low High
Likelihood Likelihood
Treat risk to
Tolerate risk and reduce the likely
its likely consequence/
consequences. exposure.
Dominant type of Dominant type of
controls will be controls will be
Detective Corrective

Low consequence Hopkin 2017, p. 186

Tr a n s f e r r i n g o r o u t s o u r c i n g r i s k ?

 Insurance (see Hopkin chapter 17)

 Pool risks with others
 Wide range of obligations and protections
available
 May use self-cover
 Forward cover for foreign exchange
fluctuations
 Financial derivatives on interest rates, fuel
prices etc, etc.
Aston University and foreign exchange

€-£
Risk and Uncertainty
Futures on oil – more options

 For airlines etc., fuel is very volatile

– https://youtu.be/PgpwYeEj5Ro

 Variety of hedges to gain certainty - futures, or

options, typically traded in the market but also
‘over-the-counter’ from a bank
 When it ‘doesn’t work’ (the actual rate is better
than the contracted rate) the cost is passed
onto customers/ reduces margin
 Accounted for under IFRS9 Hedge Accounting.
Conclusion

 Risk management is a process that must be closely

managed
 It begins with comprehensive risk assessment
 Strategic risk responses will mitigate inherent risk to
residual risk
 Prepare for next week by reading chapters 7 & 10

• You will do the first Case/seminar