ARM54
Risk Management Principles and Practics
Risk Management Principles and Practics
Set of flashcards Details
| Flashcards | 84 |
|---|---|
| Language | Deutsch |
| Category | Micro-Economics |
| Level | Other |
| Created / Updated | 19.02.2016 / 03.10.2021 |
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Benefits of Risk Management for the economy
1. Reduce waste of resources
2. Improved allocation of productive resources
3. Reduce systemic risk
Risk Management Objectives and Goals
1. Support of senior management is essential
2. RM objectives must be aligned with strategy
3. Balance of risk and reward
4. Objectives reflect risk appetite and context
Chapter 1
Definition of risk
the possibility of loss or injury: peril
Chapter 1
Compare the traditional concept of risk with the evoled concept of risk.
The traditional concept of risk, inherent to insurance, is that risk is a hazard that could happend to an individual or organisation. The evolved concept of risk as "the effect of uncertainty on objectives" provides a much braoder understanding.
Chapter 1
Describe the ISO 31000:2009 definition of risk management.
Coordinated activities to direct and controll an organisation with regard to risk.
Chapter 1
Describe the holistic approach to risk management.
Recent risk management theory includes the concept of a holistic approach to risk management. Organizations now realize that it is important to manage all of their risks, not just those that are familiar or easy to quantify. Risks that seem insignificant have the potential to create significant damage or opportunity when they interact with other events. A holistic approach helps organizations to develop a true perspective on the significance of various risks.
Chapter 1
Identify the four high-level categories of risk.
- Hazard (or pure) risk
- Operational risks
- Financial risks
- Strategic risks
Chapter 1
Explain on reason why the evolution of risk management occured.
The evolution of risk management has occured in Part because of high-profile failures of large organisations during the late twentieth and early twenty-first century, followed by the global financial crisis.
Chapter 1
Describe the major changes in the risk landscape.
In large parts because of trends in technology, globalization, and finance, the risk landscape has chenged dramatically. Organizations opeerate in a global enviroment where they face hazard risks such as earthquakes and floods, political risks such as terrorism, economic risks such as a recession, and financial risk such as currency exchange rates. Interconnection of these risks adds to their complexity and potential effect on organizations.
Chapter 1
Categorize the following risks into the four high-level risks:
Cost of materials increases.
Operational risk
Chapter 1
Categorize the following risks into the four high-level risks:
Computer hackers steal confidential information
Hazard risk
Chapter 1
Categorize the following risks into the four high-level risks:
Competitor hires key employees.
Strategic risk
Chapter 1
Categorize the following risks into the four high-level risks:
United States dollar falls against the euro, making the organisations dollar debts more expensive to pay
Financial risk
Chapter 1
Categorize the following risks into the four high-level risks:
There is a fire at a plant.
Hazard risk
Chapter 1
Categorize the following risks into the four high-level risks:
Credit rating is reduced by a rating agency, resulting in increased cost of borrowing.
Financial risk
Chapter 1
Explain systemic risk.
The potetial for a major disruption in the function of an entire market or financial system.
Chapter 1
Explain cost of risk
The total cost incurred by an organization because ot the possibiliy of accidental loss.
Chapter 1
Describe how an organization's total cost of risk associated with asset or activity is calculated.
An organization's cost of risk associated with an asset or activity is the total of these:
- Costs of accidental losses not reimbursed by insurance or other outside sources
- Insurance premiums or expenses incurred for noninsurance indemnity
- Costs of risk control techniques to prevent or reduce the size of accidental losses
- Costs of administering risk management activities
Chapter 1
Describe three benefits to an organisation of reducing deterrence effects by risk management.
Risk management reduces the deterrence effects of uncertainty about potential future accidental
losses by making these losses less frequent, less severe, or more foreseeable. The resulting reduction
in uncertainty benefrts an organization in these ways:
- Alleviates or reduces management's fears about potential losses, thereby increasing the feasibility of ventures that
once appeared too risky
- Increases proflt potential by greater participation in investment or production activities
- Makes the organization a safer investment and, therefore, more attractive to suppliers of investment capital through
which the organizarion can expand
Chapter 1
Explain how risk management can help an organization increase intelligent risk taking.
A benefit of risk management includes providing the organization with a framework ro analyze
the risks associated with an opportunity and then to manage those risks. Risk management can
help the organization decide if the potential rewards are greater than the downside risks, thereby
increasing intelligent risk taking.
Chapter 1
Explain how risk management can helb an organization maximize its profittability.
Risk management can help an organization maximize its profitability by providing it with informa-
tion to evaluate the potential risk-adjusted return on its activities and to manage the risks associ-
ated with those activities. Although the same amount of capital may be required for each acriv-
ity being considered, the risk-adjusted retum will not be the same. Risk managers can help the
organization evaluate the risks and potential retums of its activities and how these activities will
affect the organization's efforts to meet its objectives.
Chapter 1
Describe the benefits of holistic risk management compared with traditional risk management for an organisation.
Tradítional risk management was conducted in silos within an organization. This fragmented
approach can miss critical risks to the organization and fails to provide senior management with
a picture of the organization's risk portfolio and proflle. An integrated, holistic approach that man-
ages risk across all levels and functions within an organization presents a more complete picture of
an organization's risk portfolio and profile. This picture allows for better decisions by and im-
proved outcomes for senior management.
Chapter 1
Describe three benefits of risk management for the entire economy.
Risk management beneflts the entire economy by reducing waste of resources, improving alloca-
tion of productive resources, and reducing systemic risk.
Chapter 1
Using the data below, calculate the total coast of risk:
Cost of accidental losses not reimbursed by insurance: 1.2 million
Insurance premiums: 12 million
Risk control techniques: 2 million
Cost of administering risk management activitiies: 0.5 million
The total cost of risk is calculated in this way:
$1.2 million +
$10 million +
$2 million +
$0.5 million = $13.7 million
Chapter 1:
Explain Value at risk
A threshold value such that the probability of loss on the portfolio over the given time horizon exceeds this value, assuming normal markets and no trading in the portfolio.
Chapter 1
List typical risk management goals (8)
- Tolerable uncertainty
- Legal an regulatory compliance
- Survival
- Business continuity
- Earings stability
- Profitability and growth
- Social responsibility
- Economy of risk management operations
Chapter 1
Summarize how an organization should aling its risk management objectives.
Each organization should align its risk management objectives with its overall objectives. These
objectives should reflect the organization's risk appetite and the organization's internal and exter-
nal context.
Chapter 1
Explain the risk management goal of tolerable uncertainty.
A typical risk management goal is tolerable uncertaint¡ which means aligning risks with the or-
ganization's risk appetite. Managers want to be assured that whatever might happen will be within
the bounds of what was anticipated and will be effectively addressed by the risk management
program. Risk management programs should use measurements that align with the organization's
overall objectives and take into account the risk appetite of senior management.
Chapter 1
Describe the risk management goal of satisfiiing the organization's legal requirements.
An important goal for risk management programs is to ensure that the organization's legal obligations are satisfred. Such legal obligations are typically based on these items:
- Standard of care that is owed to others
- Contracts entered into by the organization
- Federal, state, provincial, territorial, and local laws and regulations
Chapter 1
Summarize the role of risk management in the survival of an organization.
Survival of an organization depends on identifiiing as many risks as possible that could threaten
the organization's ability to survive and managing those risks appropriately. It also depends on
anticipating and recognizing emerging risks.
Chapter 1
Identify the steps an organization should take to provide business continuity
- ldentify activities whose interruptions cannot be tolerated
- Identify the types of accidents that could interrupt such activities
- Determine the standby resources that must be immediately available to counter the effects of those accidents
Chapter 1
Explain how risk management helps an organization meet the minimum profit
expectation for an activity.
To achieve that minimum amount, risk management professionals must identifi/ the risks that
could prevent this goal from being reached, as well as the risks that could help achieve this goal
within the context of the organization's overall objectives.
Chapter 1
Give an example of how each of the following risk management program goals might conflict with the goal of economy of risk management operarions:
a. Tolerableuncertainty
b. Legality
c. Social responsibility
The risk management program goal of economy of operations conflicts with other risk manage-
ment goals in these ways:
a. Tolerable uncertainty might conflict with the goal of economy of operations because of the cost of risk management efforts.
b. Legality might conflict with the goal of economy of operations because implementing safetystandards could be an added expense.
c. Social responsibility might conflict with the goal of economy of operations because obligationssuch as charitable contributions could raise costs.
Chapter 1
Describe the use of exposure as a risk measure.
Exposure provides a measure of the maximum potential damage associated with an occurrence.
Generally, the risk increases as the exposure increases, assuming the risk is nondiversifiable.
Chapter 1
Explain the effect of volatility on risk.
Yolatility provides a basic measure that can be applied to risk. Generally, risk increases as volatil-
ity increases.
Chapter 1
Describe how consequences are used to measure risk.
Consequences are the measure of the degree to which an occurrence could positively or negatively
affect an organization. The greater the consequences, the greater the risk.
Chapter 1
Summarize how the relationship between likelihood and consequences affects
risk management.
The relationship between likelihood and consequences is critical for risk management in assessing
risk and deciding whether and how to manage it. Therefore, organizations must determine to the
extent possible the likelihood of an event and then determine the potential consequences if the
event occurs. In assessing the level of risk, the risk management professional must understand to
the extent possible both the likelihood and the consequences.
Chapter 1
Compare the risk related to short and long time horizons.
Longer time horizons are generally riskier than shorter ones.
Chapter 1
Explain the effect of correlation on an organization's risk.
Correlation is a measure that should be applied to the management of an organization's overall
risk portfolio. If two or more risks are similar, they are usually highly correlated. The greater the
correlation, the greater the risk.
Chapter 1
An international manufacturing organization has three major suppliers located in the region of Japan where the 2011 earthquake and tsunami occurred. In 201 1, the organization's production was disrupted because supplies could not
be received, and this resulted in a loss of sales of $200 million. Explain whether these suppliers present a future risk to the organization according to the basic risk measures that should be managed.
The organization has risk from exposure, consequences, and correlation related to these suppli-
ers. The consequences to the organization of disruption to the supply chain were lost sales of $200
million. The maximum exposure and consequences are unknown and depend on the length of any
future disruption. The organization's risk management professionals should quantify to the extent
possible the probable range of exposure and consequences. There is correlation because the three
suppliers are in the same area. Although the likelihood of another earthquake and tsunami is not
high, the potential consequences, were they to occur, are high. Therefore, this risk should be man-
aged.
