Borlongan, Jianne Jaycee G.

May 18, 2022

BS in Accountancy – 2B Risk Management Terms

ASSIGNMENT F-1

Part I. Define the following:

A. Risk:
1. Business Risk – This is a risk associated with investments that pertain to the unsureness
of the returns commonly due to the uncertainty of the firm’s operating expenses and sales,
as sales changes alongside the changes in the economy and as the expenses greatly affect
the organization’s operating income.

2. Financial Risk - This generally relates to losing the company’s capital, which can be
determined by the capital structure of the venture. If the firm is equity-financed, the
variability in the operating income can be directly passed to the net income. But if it is
partially financed, there would be financial leverage that results in net income varies more
than the operating income, which may cause additional certainty and increase risk
premiums for investing in the firm.

3. Liquidity Risk – This is a financial risk that refers to the possibility of having hardships
in realizing and selling assets or equities or investments to pay off the firm’s obligations.
As per the ordinary shares, its liquidity risk is more complex, as some of these could have
a large price spread in the thin market.

4. Default Risk – This simply refers to the uncertainty of the return of the money invested
to a company, whether all or just a part of the whole investment.

5. Interest Rate Risk – This risk involves the potential to incur investment losses due to
the changes in the interest rates, as the bond prices and the interest rate have a negative
relationship. As the interest rate increases, the bond price would decline. Therefore,
changes in the interest rate imply changes to the investment’s value, affecting the financial
well-being of the firm.

6. Management Risk – This involves not just financial risk but also includes ethical and
control risks internally as the decisions of the management may affect the investor’s
holdings in the company. If the management performs poorly, it may negatively affect the
shareholders’ and investors’ securities in the company.

7. Purchasing Power Risk – Purchasing power could be defined as the currency’s buying
power over time. This is not uncommon when inflation or deflation arises, causing the
peso to change its value. Therefore, investors have to face the potential that the returns
they would receive from their prior investments may or may not meet their expectations
from the start.
 8. Market Risk – There could be changes in the market value of products and services due
to changes in the interest rates, market prices, and exchange rates/foreign exchange rates,
which may result in losses for the firms trading their securities in the market.

9. Operation Risk – This is the possibility of having failures and difficulties with the day-
to-day operations of the firm commonly due to inefficient internal processes, people, and
systems.

10. Credit Risk – From the point of view of the lender, this is a possibility or risk that the
asset that has been lent is impossible to return anymore, as the buyer faces insolvency,
causing them to be incapable of paying their debts.

11. Environment Risk – From the word itself, environmental risk refers to the factors
wherein the firm may have problems with their operations in the environment they are in.
This may be due to political, environmental, socio-cultural, technological, and legal
charges.

12. Regulatory Risk – This risk pertains to the possibility of changes in the laws and
regulations present in every aspect of the community, of the market, or the business itself
that may highly affect the profitability of the firms and ventures, including its investments
and securities.

13. Leadership Risk – Alongside the great responsibility entrusted to leaders of a company
or an organization, is a huge consequence of every decision they make. There is possible
destruction of reputation, accountability, and physical and financial harm once a mistake
had been made.

14. Integrity Risk – Some of the most important characteristics of good corporate
governance are transparency and accuracy which could only be achieved if integrity is
present within and outside the company. This risk refers to the possibility of having
untruthful and harmful events within the corporation that may highly affect its day-to-day
operations and its finances.
B. Risk Treatment
15. Risk Avoidance – This pertains to action taken by the company to eliminate or lessen
the exposure of the firm to risks and hazards that may cause them losses. But sometimes,
avoiding such risks also implies losing an opportunity to gain greater profits.

16. Risk Reduction – This is the process wherein the company tries to balance out the
negative risks/consequences they may face and the benefits they would gain in an
event/transaction/decision.

17. Risk Sharing – In here, the risk of loss is being shared with another party to lessen the
burden on the company through insurance and outsourcing.
 18. Risk Retention – Once the risk was not avoided and not shared through outsourcing
with another party, the firm must have a self-insurance fund or backup plan to cover the
costs and losses incurred in the risk accepted.
C. General Concept
19. Risk Management Process – This process involves assessing the risks present in the
firm, as well as its sources and measurements, then developing and designing action plans
for risk avoidance, reduction, retainment, and transfer. Next is implementing these action
plans and monitoring the management performance regarding the risks and continuously
improving the managing process of the risks.

20. Risk Appetite – This plays a significant role in the venture as this defines the capacity of
the company to absorb and accept risk alongside their pursuance of a value or investment.

21. Control Risk – This is a part of the risk management process where the company tries
to reduce, if not eliminate, the risks they may face. Though not all the risks are eliminated
and remain threats to the firm, the hazards are surely reduced to the level that the
organization may take.
Part 2. Provide practical techniques for reducing or managing the following risk.
(Minimum of one sentence each)
22. Business Risk – Most common and the best way to manage business risk is ensuring the
firm has an insurance plan. Also, if there are opportunities, the firm must have a variety
of product lines and services to have a greater chance of having more profit.

23. Financial Risk – Again, having an insurance plan would help reduce the financial risk
of the company. In line with this, the firm must always have an exit plan or a backup plan
in case their investment goes not according to the plan and expectation of returns. Also,
having another source of income or investment would be helpful. Do not invest all of the
assets to just specific security. Investments should vary.

24. Liquidity Risk – Monitoring and forecasting cash flow regularly would be a big help in
reducing liquidity risk. The company should also give attention to financial planning and
analyses to ensure the liquidity of the organization. Monitoring the working capital and
the credit balances would also be a great helping factor.

25. Default Risk – There are standard measurement tools that help gauge the default risks
that a company may incur. The lender must examine the financial capability of the
borrowers to lessen the risk of having no collection from the former after the transaction.

26. Interest Rate Risk – To avoid such risk, the company may have the option to limit their
fixed-income investments traded in the market or by holding bonds of different durations.

27. Management Risk – Management risks begin with the possible negative effects of the
decisions and actions of management on the investors and the company itself. To avoid
such risk, the firm must ensure the competence of its personnel in coming up with effective
 decision-making and supervising their performances through management evaluation
consistently.

28. Purchasing Power Risk – Incurring such risk is inevitable for firms who are operating
in a country experiencing inflation or deflation. And one of the best ways to reduce this
negative effect on investment, some may keep the prices of the investment stable by setting
interest rates and other mechanisms, resulting in the maintenance of the purchasing
power of the amount.

29. Market Risk – When experiencing volatility and market risks, the firm should go for the
long-term investments than the short-term, as it gives a wider perspective and absorbs the
risk impact gradually.

30. Operation Risk – Having excellent internal control could be an effective way to reduce
the operational risks for the firm, especially over the process of the company. Monitoring
and ensuring the correctness and harmony of the process avoids operational risks.

31. Credit Risk – A company must follow the established fundamental principles of the
SMFG to avoid credit risks. This must be managed according to the nature of the business
and consistently with the usage of the standards. Also, credit risks could be measured
through the borrower’s capital, credit history, capability to pay, loan conditions, and
collateral associations, which should be checked by the lender before lending a credit to
ensure that there is a low credit risk once the transaction occurs.

32. Environment Risk – Oftentimes, when firms have high environmental risks, they tend
to pay huge costs as the collateral to this problem, and to lessen the possibility of incurring
higher costs, the firm must not overlook the harmony between the operations of the
company and the environment. They must ensure that the company is following all the
environmental guidelines and statutes in our constitution to avoid unnecessary fees and
additional costs.

33. Regulatory Risk – One way to reduce regulatory risk is to be updated and be informed
of the changes in the laws and regulations related to the business. There is no such thing
as dodging the statutes for the sake of the organization, the best choice would always be to
operate by these laws, and be prepared for the changes. In that way, the company would
be able to handle well their securities, especially those that are being traded in the market.

34. Leadership Risk – As mentioned above, responsibilities are tagged by accountability

and consequences of decisions and actions made. Such risk cannot be eliminated in the
business field. But one way to reduce such possibility is to be an agent of integrity and
virtue. If a leader reflects such characteristics, they would likely do what is right for the
company and by the laws established within and outside the organization.

35. Integrity Risk – Implementing quality control over the internal operations of the firm
may promote the reduction of integrity risk within the organization, as this monitors the
employees whether they work by the governance policies. Also, having an audit trail may
be a big help, as this ensures the process that the data and information relevant to the
company went through the right passes and are interpreted accordingly.