BU353 Lecture Notes - Lecture 1: Expected Loss, Operational Risk, Credit Risk
Document Summary
The meaning of risk: risk can take on multiple definitions based on the context, variability in outcomes related to expected value, the higher expected losses due to the higher probability or value of losses. Risk management: the process of planning, leading, organizing and controlling the organization"s activities to minimize the adverse effects of accidental and business loss on that organization at a reasonable cost. Influence diagram: technique for identifying and understanding the interrelationships between risk drivers. Risks faced by individuals or businesses: personal risks, 6 main categories of personal risk. Liability: earnings risk, medical expenses, physical assets, financial assets. Types of losses from hazard risk: direct losses, damage to assets. Indirect losses: loss of normal profit, continuing and extra operating expense, higher cost of funds & forgone investment, bankruptcy costs. Investment in information: cost of loss financing, retention, insurance, hedging, other contractual risk, cost of residual uncertainty, leftover risk after other methods are used.
