BU353 Chapter Notes - Chapter 1: Operational Risk, Credit Risk, European Cooperation In Science And Technology
BU353 – CHAPTER 1
RISK
• RISK: Any situation where there is uncertainty about what outcome will occur
o In insurance markets the meaning of risk is that there is a higher probability of
having a loss
RISKS FACED BY INDIVIDUALS AND BUSINESSES
• PERSONAL RISKS: Risks faced by individuals and families. Can be classified into 6
categories
o Earnings Risk
o Medical Expense Risk
o Liability Risk
o Physical Asset Risk
o Financial Asset Risk
o Longevity Risk
• BUSINESS RISKS: Reductions to the businesses value from any sources. Categorized into
the following:
o Hazard Risk → Pose a threat to life, health, property, or the environment.
Sometimes known as pure risks
o Financial Risk → Refers to uncertainty over the magnitude of cash flows due to
possible changes in prices, asset values, exchange rates, liquidity and credit risk
▪ PRICE RISK: Refers to possible changes in output and input prices. There
are three specific typees
• COMMODITY PRICE RISK: Arises from fluctuations in the price of
commodities, such as coal, copper, oil, gas or electricity
• EXCHANGE RATE RISK: When input/output prices are influenced
by fluctuations in foreign exchange rates
• INTEREST RATE RISK: Input/ouptu prices fluctuate due to changes
in interest rates
▪ CREDIT RISK: The risk that a fir’s ustoers ad the parties to hich it
has lent money will delay or fail to make promised payments
o Operational Risk → Encompasses the risk of direct or indirect loss resulting from
inadequate or failed internal processes, people or systems.
o Strategic Risk → Refers to risks assoiated ith a orgaizatio’s aility to
achieve their business strategy
• ENTERPRISE RISK MANAGEMENT: A strategic business discipline that supports the
ahieeet of a orgaizatio’s ojeties y addressig the full spetru of its risks
and managing the combined impact of thoses risks as an interrelatied risk portfolio
THE COST OF RISK
• The cost of risk has five main componenets:
o Expected losses
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Document Summary
Risk: risk: any situation where there is uncertainty about what outcome will occur. In insurance markets the meaning of risk is that there is a higher probability of having a loss. Risks faced by individuals and businesses: personal risks: risks faced by individuals and families. Can be classified into 6 categories: earnings risk, medical expense risk, liability risk, physical asset risk, financial asset risk, longevity risk, business risks: reductions to the businesses value from any sources. Categorized into the following: hazard risk pose a threat to life, health, property, or the environment. There are three specific typees: commodity price risk: arises from fluctuations in the price of commodities, such as coal, copper, oil, gas or electricity, exchange rate risk: when input/output prices are influenced by fluctuations in foreign exchange rates. The cost of risk: the cost of risk has five main componenets, expected losses, direct losses the dollar value of damage done to the items.