RISK MANAGEMENT

DEFINATION:

Risk management is a systematic process of identifying, assessing, prioritizing, and mitigating risks to achieve business objectives. It involves analyzing potential events or situations that may have an impact on an organization's ability to achieve its goals and taking proactive measures to minimize or control the negative consequences. The goal of risk management is not to eliminate all risks but to manage them effectively in order to optimize opportunities and reduce potential harm.

Market risk is categorized into 2 types:

1.Systematic Risk

2.Un-Systematic Risk

Systematic Risk:

Also known as market risk or undiversifiable risk.

It is associated with factors that affect the entire market or a large segment of it.

Systematic risk cannot be eliminated through diversification because it is inherent in the overall market or economy.

Examples of systematic risks include economic recessions, interest rate changes, inflation, political instability, and natural disasters.

Investors are exposed to systematic risk regardless of how diversified their investment portfolios are.

Unsystematic Risk:

Also known as specific risk, diversifiable risk, or idiosyncratic risk.

It is associated with factors that are specific to a particular company, industry, or asset.

Unsystematic risk can be mitigated through diversification because it is unique to a specific investment and may not affect other unrelated investments.

Examples of unsystematic risks include company-specific events like management changes, product recalls, legal issues, and competitive pressures.

By holding a diversified portfolio of assets, investors can reduce the impact of unsystematic risk on their overall investment performance.

Types of Risk Management:

Financial Risk Management:

Market Risk: The risk of financial loss due to changes in market prices, such as interest rates, exchange rates, and commodity prices.

Credit Risk: The risk of loss arising from the default of a borrower or counterparty.

Liquidity Risk: The risk that an organization may not be able to meet its short-term financial obligations.

Operational Risk Management:

Internal Risks: Risks related to internal processes, systems, people, and technology.

External Risks: Risks arising from external factors, such as natural disasters, political events, and regulatory changes.

Reputational Risk: The risk of damage to an organization's reputation, which can impact its relationships with customers, investors, and other stakeholders.

Strategic Risk Management:

Strategic Risks: Risks associated with strategic decisions, market dynamics, competition, and changes in business environment.

Business Model Risk: The risk of the chosen business model becoming obsolete or ineffective.

Compliance Risk Management:

Legal and Regulatory Risks: Risks related to non-compliance with laws and regulations governing the industry.

Ethical Risks: Risks associated with ethical standards and conduct within the organization.

Reputational Risk Management:

Brand and Image Risks: Risks related to damage to the organization's brand and public perception.

Communication Risks: Risks associated with miscommunication or lack of transparency.

Project Risk Management:

Project-specific Risks: Risks related to the successful completion of projects, including budget overruns, delays, and scope changes.

Resource Risks: Risks associated with the availability and allocation of resources for a project.

Information Security Risk Management:

Data Breach Risks: Risks related to the unauthorized access, disclosure, or loss of sensitive information.

Cybersecurity Risks: Risks associated with cyber threats, including malware, hacking, and denial-of-service attacks.

Environmental Risk Management:

Natural Disaster Risks: Risks related to events such as earthquakes, floods, hurricanes, and other natural disasters.

Sustainability Risks: Risks associated with the environmental impact of business operations.