Professor’s Name:

Mallika Ramakrishnan
TYBFM
SEM- VI
Risk Management
Unit-02 – Evaluation of Risk
Evaluation of Organizations ability to bear
Risk
▪ 1. Risk Appetite – Total exposed amount that organization wants to undertake
one or more desired outcomes.
▪ 2. Risk Tolerance – amount of risk organization prepared to accept in total
within a certain business level. Risk tolerance is lower.
▪ 3. Risk Culture – Norms and tradition organization identifies and regulate the
way in which they identify, understand, discuss and act on risk.
▪ 4. Risk Target- Desired level , believes ideal to meet its objectives
▪ 5. Risk Capacity – Amount of risk that can be actually beard
▪ Risk Attitude- View to value that may be gained in comparison to the related
potential losses.
 Examples of a company's stakeholders
Different Stakeholder’s have different concerns & risk
Stakeholders: Stakeholder's concerns

Government taxation, legislation, employment, truthful reporting, legalities, externalities...

rates of pay, job security, compensation, respect, truthful communication, appreciation,

Employees acknowledgement, recognition.
Customers value, quality, customer care, ethical products.

providers of products and services used in the end product for the customer, equitable business
Suppliers opportunities.
Creditors credit score, new contracts, liquidity.

Community jobs, involvement, environmental protection, shares, truthful communication.

Trade unions quality, worker protection, jobs.
profitability, longevity, market share, market standing, succession planning, raising capital, growth,
Owner(s) social goals.
Investors return on investment, income.
Responding to Stakeholders Expectations:
▪ 1. Analyze Stakeholders – conduct analysis of stake holder and find how the
project will affect their problems and needs what will motivate them.
▪ 2. Assess influence – Measure the degree of stakeholders influence, more the
influence more will be the support. Know what needs enable them to
influence more.
▪ 3. Understand their expectations: Drill down stakeholders specific
expectations.
▪ 4.Define “Success” – Make the critical gather definitions upfront and include
objectives to help ensure that all stakeholders will be supportive of the final
outcomes.
▪ 5. Keep Stakeholders involved- Seeking inputs from stakeholders
▪ 6. Keep Stakeholders informed- Sending regular information and updated to
all
Most important role of heads in company

Risk
Committee

Risk
Manager
(CRO)
Role of Risk Manager :
▪ 1) Risk Manager (Chief Risk Officer) – Collects information from Risk
team, financial controllers and Operations team. CRO is responsible for
organizing, developing and implementing the process of identifying,
measuring and controlling risk. Based on information a report is
prepared and presented to MD & CEO of company.
▪ After analysis if required the CEO/ MD may pass on necessary details
to credit team or distressed loan bureau for better debt recovery. Also
the appropriate risk process can be set with applicable regulations.
▪ The CRO should ensure that all required actions are taken and suitably
presented to the board.
Role of Risk Committee
▪ 2. A) Risk Committee: Risk management committee of the Board of
Directors (the “ Board” ) is to assist the Board in fulfilling its corporate
governance oversight responsibilities regard to the risk.

▪ 2.B) Risk Committee (the “Committee) is an independent committee of

the BOD that has worldwide operations and oversight of the operation
of the corporation’s global risk management framework.
QUANTITATIVE RISK MANAGEMENT
▪ A quantitative risk analysis is an analysis of the highest priority risks
during which a numerical or quantitative rating is assigned in order to
develop a probabilistic analysis of the project.
▪ Tools of Quantitative Risk Management:
▪ 1) Sensitivity analysis

▪ 2) Expected Monetary value analysis

▪ 3)Decision Tree Analysis

▪ 4) Tornado Diagrams
▪ 5) Modeling and simulation
▪ 6) Expert Judgment
 Business Risk
▪ Market Risk
▪ Credit Risk
▪ Liquidity Risk
▪ Technological Risk
▪ Legal Risk
▪ Environmental Risk
▪ Reputation Risk
▪ Country Risk
Credit Risk
▪ 1) Types of Credit Risk

▪ A) Financial Risk

▪ B) Business Risk

▪ C) Facility Risk

▪ D) Documentation Risk
Liquidity Risk
▪ Asset Liquidity Risk

▪ Funding Liquidity Risk

▪ Causes of Liquidity Risk

▪ 1) Lack of Counterparty

▪ 2) Fall in credit rating

▪ 3) High bid ask gap

Measure of Liquidity Risk
▪ Impact Cost- Volume & No in counts

▪ Actual Price – Ideal Market Price / Ideal Market Price * 100

▪ 2) Market Depth

▪ 3) Immediacy

▪ 4) Liquidity adjusted value at risk – VAR + ELC (EXOGENOUS LIQUIDITY COST)

Technological Risk – Threaten assets & Process
▪ Some common sources of technological risk are:

▪ 1) Hardware & Software failure

▪ 2) Malware

▪ 3) Viruses

▪ 4) Spam, Scams and Phishing

▪ 5) Human error

▪ 6) Hackers

▪ 7) Fraud

▪ 8) Passwords Theft

▪ 9) Denial of service

▪ 10) Security breaches

▪ 11)Staff dishonesty

▪ 12) Natural disaster

Techniques used to overcome technological
risk :
▪ 1. Secure Computers, servers and wireless networks from any external threat.

▪ 2. Use updated anti-virus and anti-spyware protection and firewalls

▪ 3. Regularly update software to the latest version

▪ 4. use data backups

▪ 5. Secure your passwords

▪ 6. Train staffs

▪ 7. Understand legal responsibilities for online business

Legal Risk Techniques to overcome
▪ 1) Regulatory Risk ▪ 1) Conducting legal audit

▪ 2) Compliance Risk ▪ 2) Communicating & Educating people

▪ 3) Contract Risk ▪ 3) Having strong compliance and governance

policies
▪ 4) Non- contractual Rights
▪ 4) Employing experienced and qualified legal
▪ 5) Non Contractual Obligations resources

▪ 6) Dispute Risk

▪ 7) Reputation Risk
Environmental Risk
▪ 1) Damage to brand reputation

▪ 2) Penalties for violation

▪ 3) Damages resulting from faulty or defective construction

▪ 4) Losses from 1st and 3rd party property and material liability

▪ 5) Expenses for clean up of emissions (the production and discharge of something,

especially gas or radiation)
▪ 6) Business interruption losses during contamination removal

▪ 7) Costs associated with premiums, litigation, investigation and compliance.

▪ 8) Expenses for remediation measures.

Reputation Risk – danger to the good name or
standing of business or entity
▪ 1) Directly as the result of the daily actions of the company itself

▪ 2) Indirectly due to the actions of the employee

▪ 3) Indirectly through other parties, such as joint venture partners or suppliers.

▪ 4) Reputational risk is a hidden danger

▪ 5) Disobedient or undisciplined employees

▪ 6) Adverse risk typically associated with ethics, security, sustainability, quality and
innovation
Country Risk
▪ Country risk is the risk that a foreign government will default on its bond or other
financial commitments.
▪ It is also refers to the broader political and economic unrest affect the securities of issuers
doing business in a country.
▪ Which creates volatility , in turn investors demand higher returns as compensation for the
added risk.
▪ Main source of country risk is change in business environment which can affect operating
profits or the value of assets in the country.
▪ Some other factors: Financial factors such as currency controls, devaluation or regulatory
changes or stability factors such as mass riots, civil, war & Political risk
Political Risk – sudden changes in policies of
a country due to change in government
▪ 1) Restrictions on Remittances of Profit

▪ 2) Placing several restrictions on activities of MNCs in country

▪ 3) Nationalising assets of business

▪ 4) Restrictions on employing foreign nationals

Commercial Risks – wrong estimation of
demand for products before investing
▪ 1) Fall in demand due to decline in income

▪ 2) Fall in demand due to cultural variations

▪ 3) Fall in demand due to change in customer taste

Alternative Investment
Strategies
Alternative Investment Strategies
▪ When most people think of investing, they generally think of traditional
investments—namely stocks, bonds, and cash. Whether it’s the index fund in your 401(k)
or the cash in your savings account, these traditional investments are common for most
individual investors.
▪ But that's only part of the picture. There's another category of investing beyond traditional
investments, called alternative investments. One of the most dynamic asset classes,
alternatives cover a wide range of investments with unique characteristics. Many
alternatives are becoming increasingly accessible to retail, or individual,
investors—making knowing about them increasingly important for all types of investors
and industry professionals.
Private Equity
▪
Private equity is a broad category that refers to capital investment made into private
companies, or those not listed on a public exchange, such as the New York Stock
Exchange. There are several subsets of private equity, including:
▪ Venture capital, which focuses on startup and early-stage ventures

▪ Growth capital, which helps more mature companies expand or restructure

▪ Buyouts, when a company or one of its divisions is purchased outright

▪ An important part of private equity is the relationship between the investing firm and the
company receiving capital. Private equity companies often provide more than capital to
the firms they invest in; they also provide benefits like industry expertise, talent sourcing
assistance, and mentorship to founders.
Characteristics of PE Fund Advantages
1. Higher Returns
▪ 1. High Returns
▪ 2. Financing new Project
▪ 2. Limited Partnership
▪ 3. Reduces Risk
▪ 3. Successful Exit
▪ 4. Promotes Entrepreneurship
Categories of Private Equity:

1) Venture Capital (VC)

2) Leverage Buyout (LBO)

3) Mezzanine Capital

4) Angel’s Capital

5) Fund of Fund (FOF)

Hedge Funds
▪
Hedge funds are investment funds that trade relatively liquid assets and employ various
investing strategies with the goal of earning a high return on their investment. Hedge fund
managers can specialize in a variety of skills to execute their strategies, such as long-short
equity, market neutral, volatility arbitrage, and quantitative strategies.
▪ Hedge funds are exclusive, available only to institutional investors, such as endowments,
pension funds, and mutual funds, and high-net-worth individuals.
Characteristics of a Hedge Fund
▪ Limited Partnership

▪ Dynamic Management

▪ Lack of Regulations

▪ Medium to Long Term Investment Horizon

▪ Large Initial Investment Required

Real Estate

▪
There are many types of real assets. For example, land, timberland, and farmland are all
real assets, as is intellectual property like artwork. But real estate is the most common
type and the world’s biggest asset class.
▪ In addition to its size, real estate is an interesting category because it has characteristics
similar to bonds—because property owners receive current cash flow from tenants paying
rent—and equity, because the goal is to increase the long-term value of the asset, which is
called capital appreciation.
▪ Like with other real assets, valuation is a challenge in real estate investing. Real estate
valuation methods include income capitalization, discounted cash flow, and sales
comparable, with each having both benefits and shortcomings. To become a successful
real estate investor, it’s crucial to develop strong valuation skills and understand when and
how to use various methods.
▪ Three types of Real Estate – Equity, Mortgage, Hybrid
Managed Futures
▪
Managed futures is a trend following (momentum) investment strategy that uses
quantitative signals to define when securities are trending. Often, these signals compare
the current (spot) price of an asset to the trailing (historical) moving average of the price
and then make investments based on those trends. If the spot price is above the moving
averages, then the security is in an uptrend, and vice versa.
Advantages of Managed Futures
▪ 1. Reduces Risk

▪ 2. High Liquidity

▪ 3. Access to Global Markets

▪ 4. Easy Entry and Exit

▪ 5. Higher Returns
Artwork and Collectibles

▪ Artwork and collectibles are an alternative investment that requires a lot of market
knowledge and patience. The key to investing in artwork and collectibles is correctly
predicting if and how they might grow in value over time. Since it’s hard to judge demand
and appeal 20-50 years down the line, this investment is a shot in the dark if you don’t
know what you’re doing. Between counterfeiting and basic wear and tear, artwork and
collectibles are very illiquid and likely to lose value, so if you’re going to invest, make
sure what you’re buying is something you’ll cherish forever.
▪ If you’re not looking to purchase art yourself, art finance, through an investing platform
such as Yield street, is another alternative.
▪