INTRODUCTION TO RISK

MANAGEMENT
Unit I
 Risk Management Tools
 While diversification is a way to reduce the risk,
corporate risk management has over a period of time
developed various risk management tools, which can
be described as under.
- Hedging - Forwards
- Futures - Options
- Swaps - Hybrid Debt Securities
 These risk management tools are used in addition to
insuring the assets by underwriting to insurance
policies.
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 Need for Risk Management
 The lower the margin, greater the need for risk
management. Globalization has resulted in pressure
on margins.
 The challenge of a modern corporation is to ensure
wealth maximization for their shareholders that is
consistent with their risk preference; i.e., effectively
manage risk and ensure adequate returns.
 Risk management has to be more formal and
structured in modern corporations. Integration of
core business and risks is needed.

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 Need (Contd.)
 Increased volatility around the world and highly
leveraged positions (due to derivatives participation)
create a further need for risk management.
 Risk management does not imply avoidance of risk.
 Taking reasonable and well-understood risks is
necessary to earn returns.
 Required for this are to set up prudent policies and
procedures to:
- identify - measure
- monitor - control risks
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 Risk Management Process
 Define risk management framework
 Specify the level of the organization (strategic,
business, operational) at which risk management is
expected to be implemented
 Identify risks and their consequences
 Identify risk preference of stake holders
 Clarity of objectives of those situations where risk is
to be avoided, preserved or brought about through
risk management

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 Risk Management Process
(Contd.)
 Identify internal or external factors that limit
application of any risk management strategies
 Establish ground rules for successful constitution of
risk management
 Adopt tools and techniques for identification,
subsequent management, tracking and reporting of
risk
 Have clarity about measurement of impact

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 Risk Management Approaches &
Methods
 Following are some of the approaches for managing
risk:
- Risk avoidance - Loss control
- Combination - Separation
- Risk transfer - Risk retention
- Risk sharing

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 Integrated Approach to Risk
Management
 It is an issue that has to be dealt with by business
managers
 The risk manager and risk department can only steer
the efforts and ensure that risk gets escalated at
appropriate levels and there is adequate follow-up
 The steps to be followed are:

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 Integrated Approach - Steps
 Board level attention
 Risk organization structure
 Risk profile
 Embedding risks into business management
 Risk reporting
 Risk culture
 Open communication
 Teams & committees
 Risk Management training
 Front office compensation

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