• What is Risk
• Risk management
• Methods for treating risk
• Risk management process
Risk:
• Risk—Uncertainty arising from the possible occurrence of given
events.
• Risk - Pure—The risk involved in situations that present the
opportunity for loss but no opportunity for gain. Pure risks are
generally insurable, whereas speculative risks (which also present the
opportunity for gain) generally are not.
• Risk - Speculative—Uncertainty about an event under consideration
that could produce either a profit or a loss, such as a business venture
or a gambling transaction. A pure risk is generally insurable while
speculative risk is usually not.
• Event Risk—Risk of loss associated with fortuitous occurrences (e.g.,
fires, hurricanes, tortuous conduct). Event risk, which is synonymous
with pure risk, hazard risk, or insurance risk, presents no chance of
gain, only of loss. The perils covered by traditional property and
casualty insurance products are within the realm of event risk.
Risk Management:
• Risk management—The practice of
identifying and analyzing loss exposures
and taking steps to minimize the financial
impact of the risks they impose. Traditional
risk management, sometimes called
"insurance risk management," has focused
on "pure risks," but not business risks (i.e.,
those that may present the possibility of loss
or gain).
Methods for treating risk:
• Traditional risk management techniques for handling
event risks include:
– Risk Retention – Planned Acceptance of Losses by Deductibles,
Deliberate Non-Insurance, and Loss-Sensitive Plans Where Some,
But Not All, Risk Is Consciously Retained Rather Than
Transferred
– Contractual or Non-Insurance Risk Transfer – Shifting
Responsibility For First or Third Party Losses To Another Entity
– Risk Avoidance – Not Engaging In Activities That Create Risk
– Risk Control - Reduce The Possibility That a Loss Will Occur
and/or Reduce the Severity of Those That Do Occur.
– Insurance Transfer
Risk management process:
• Risk management process—A systematic approach to
treating risk: identification and analysis of exposures,
selection of appropriate risk management techniques to
handle exposures, implementation of chosen techniques,
and monitoring of the results.
• Risk tolerance—The willingness of an organization to
incur risk to gain future reward. In insurance, risk
tolerance may be evidenced by a willingness of the insured
to increase deductibles or self-insured retentions (SIRs).
• Retention capability—The mount of aggregate incurred
losses that an insured can retain in any one financial
reporting period without creating an adverse impact on
cash flow or earnings. Compare to Risk tolerance
Risk management process (cont.)
• Risk identification—The qualitative determination of risks that are
material, i.e., that potentially can impact the organization's
achievement of its financial and/or strategic objectives. This is often
done through structured interviews of key personnel by internal (e.g.,
internal audit) or external experts. In some cases, the organization's
business process maps are used to guide the risk assessment
ECONOMIC/
TRANSACTION EXPOSURE TRANSLATIONAL EXPOSURE
OPERATING EXPOSURE
INCORPORATING
CONVERSION OF
FOREIGN ASSET,LAIB, EFFECT OF FLUCTAUTION
FOREIGN CURRENCY
INCOME ON CASH FLOWS
INTO DOMESTIC
TO PARENT COMPANY
Exchange Risk: Transaction Exposure
Mitigate:
Cause: Import-Export industries,
By Hedging -covering risk
Arises Due to fluctuation Receivables-Payables
Forward contract , Option,
Exposure Netting, Lead-
Lags
Cause:
Unexpected changes in Exchange Mitigate:
rate,Impact on cash inflows and Market selection
outflows
Pricing
Product
Functional Segregation
System in place
Limiting Risk
Timely Reporting
Control on Nostro/vostro accounts
Internal Audit/System Audit
BANKING
Capital Adequacy Ratio
A bank's capital, or equity, is the margin by which creditors are covered if the bank had to liquidate assets.
1)Liquidity Risk
Particulars 1-14 15-28 29 days 3 6 1-year – 3 yrs – >5 Total
days days 3 months- months- 3 years 5yrs years
months 6 1 year
months
Inflows 1000 2500 1200 3000 5000 5000 6000 10000 33700
( Maturing Assets)
Outflows 1500 4000 3000 8000 7600 9000 500 100 33700
( Maturing
Liabilities)
Gap (-) 500 (-) 1500 (-)1800 (-) 5000 (-)2600 (-) 4000 5500 900
(Inflows-Outflows)
Gap as % to outflows -33% -38% -60% -63% -34% -44% 1100% 9900%
Limit By RBI -20% -20% Banks are Expected to place internal limits as prescribed by the Board
Interest Rate Risk
Particulars 0-6M
Interest Rate
6M-1Y
Risk
>1Y Total
Assets 100 1000 5000 6100
Liabilities 2000 1000 2500 5500
Gap -1900 0 2500 600
Credit Derivatives
Market Risk
Market Risk Mitigation Strategies