Chapter 9: Risk Management

Front 1

The theory of risk management

Back 1

Volatility of protect returns should be managed if they can generate higher returns by managing risky projects.

Front 2

Risk and stakeholder conflict

Back 2

Risk profile matches the shareholder portfolio. Altering risk profile such as increasing risk would lead to shareholders increasing required returns.

Front 3

Risk policy decisions are made based on

Back 3

Type of business area

Operating gearing

Financial gearing

Accuracy of forecasts

Front 4

Types of business area and how it affects riskiness

Back 4

Economic volatility of industry

Degree of seasonality

Intensity of competitor action

Front 5

Operation gearing and how it affects riskiness

Back 5

Proportion of fixed costs to variable costs in cost structure.

Outsourcing vs providing internally

Leasing vs buying

Full time staff vs freelance providers

Front 6

Financial gearing and how it affects riskiness

Back 6

Increasing debt reduces CoC but increases risk of bankruptcy

Front 7

Accuracy of forecasts

Back 7

Investment program relies heavily on accuracy of cash flow forecasts

Front 8

What must the risk framework cover

Back 8

Risk awareness

Risk assessment and monitoring

Risk management

Front 9

Risk management

Back 9

Strategies for dealing with risk and planned responses should unprotected risks materialize.

Front 10

Risk awareness

Back 10

Estimates in forecasts. Identify risk and probability of occurrence. Strategic, tactical, and operational.

Front 11

Strategic risks

Back 11

Affect overall direction of project. Macroeconomic or change in corporate policy.

Front 12

Operational risk

Back 12

Those affecting day to day running of project

Production breakdown

Breakdown of supply chain

Failure of distribution networks

Breakdown of supply chain

Failure to recruit staff

Front 13

Key decisions about risk assessment

Back 13

Assessment frequency, criteria for risk categorization and how often assessments should be updated.

Front 14

Internal audit

Back 14

Assist in creation and successful running of monitoring systems

Front 15

Information systems and risk monitoring

Back 15

Ensure that any changes affecting project estimates are:

Recorded

Brought to the attention of the responsible managers

Dealt with in an appropriate way

Front 16

Management information systems

Back 16

Feeding back operational data to allow for action to prevent or mitigate risk

Front 17

Executive information systems

Back 17

Bring executives up to date with external information.

Front 18

Mitigation

Back 18

Controls.

Benefits should outweigh costs

Front 19

Hedging the risk

Back 19

Some sort of transaction, designed to minimise exposure to unwanted business risk. Purchase or sale of a derivative security in order to neutralize all or part of a risk.

Front 20

Prefect hedge

Back 20

Eliminate prospects of any future gains or losses

Front 21

Diversification

Back 21

Involves reducing impact of one protect by having a portfolio of different ongoing projects.

Front 22

4T approach to risk management

Back 22

Tolerate it

Transfer it

Terminate it

Treat it

Front 23

Likelihood and impact matrix

Back 23

Front 24

Tolerate

Back 24

Accept risk will occur but don't put in place any systems to manage it

Front 25

Transfer

Back 25

Pass on the risk to someone else.

Insure

Take out fixed price contracts

Outsource production

Front 26

Terminate

Back 26

Deciding against project activity altogether. Or in projects bail out

Front 27

Treat

Back 27

Controls to reduce likelihood or consequences of event occurring

Front 28

Political risk

Back 28

Risk a company will suffer a loss as a result of actions taken by government or people of a country

Front 29

Sources of political risk

Back 29

Exchange control regulations

Import quotas

Import tariffs

Insist on minimum local shareholding

Company structure (all joint ventures only)

Discriminatory action

Financing decisions

Front 30

Exchange control regulations

Back 30

Rationing supply of foreign currency to prevent locals buying foreign goods.

Banning repatriation.

Front 31

Discriminatory action

Back 31

Prevent profitability of foreign organisation

Super taxes

Restricted access to local borrowing (foreign more expensive)

Expropriating assets

Front 32

Expropriation assets

Back 32

National government sizes property through national issues. Must give prompt consideration at fair value in a convertible currency

Front 33

Measurement of political risk

Back 33

Old hands

Grand tours

Commercially produced Surveys

Quantitative measures

Front 34

Micro political risk

Back 34

Specific to an industry, company or project within the host country.

Front 35

Macro political risk

Back 35

General political risk affecting all organizations within a country

Front 36

Old hands

Back 36

Experts provide advice on risk of investment in a particular country

Front 37

Grand tours

Back 37

Group of employees sent to a potential country to act as an inspection team.

Front 38

Surveys

Back 38

Commercially produced databases to rate political risk using Oracle of Delphi.

Front 39

Management of political risk prior to investment

Back 39

Planned local ownership

Pre trading agreements

Political risk insurance

Front 40

Management of political risk during investment

Back 40

Production strategies

Control of processes

Distribution control

Market control

Location

Front 41

Planned local ownership

Back 41

Target dates for release of shares into local ownership in order to create benefit for local government over time

Front 42

Pre trading concessions and agreements

Back 42

Agreements with local authorities about rights, responsibilities, remittance and local equity investments.

Front 43

Political risk insurance

Back 43

Transfer risk by taking out an insurance policy

Front 44

Production strategy

Back 44

Outsourcing to locals loss of control

Produce directly in host country

Import from parent branch

Front 45

Market control

Back 45

Securing markets through copywriting, patents and trademarks to deter political intervention

Front 46

Local finance

Back 46

Local finance means any damaging intervention by government also harms local industry.

Front 47

Borrow worldwide

Back 47

Discourages expropriation because company defaulting in loans will impact worldwide.

Front 48

Economic risk

Back 48

Long term exchange rate risk that affects value of a company. PV of future cash flows. Also local economic conditions.

Front 49

What does economic risk affect

Back 49

Affordability of exports (competitiveness) and imports (profitability)

Value of repatriated profits

Front 50

Direct currency risk

Back 50

If the firms home currency strengthens, their predicts are less competitive due to being more expensive

Front 51

Indirect currency risk

Back 51

If their are two foreign competitors and home currency strengthens vis a vis the customer's home currency the competitor is going to derive a competitive advantage.

Front 52

Managing economic risk

Back 52

Diversification of production and supply

Diversification of financing

Front 53

Regulatory risk

Back 53

potential for laws related to a specific entity to change and affect:

How the business as a whole can operate

The viability of planned and ongoing investments

Front 54

How to manage regulatory risk

Back 54

Incorporate the role within internal audit

Consult a firm specialising in regulatory risk

Front 55

Compliance risk

Back 55

Risk of losses associated with not complying with regulation

Front 56

Fiscal risk

Back 56

Risk of government assuring tax policy to raise more revenue

Front 57

How to factor risks into investment appraisal

Back 57

Expected values

Use of the CAPM model

Sensitivity analysis and simulation

Front 58

Probability analysis

Back 58

Sum of each outcome multiplied by its probability

Front 59

Conditional probability

Back 59

Probability of one outcome dependent on another outcome

Front 60

Sensitivity analysis

Back 60

Measures change in a particular variable which can be tolerated before the NPV of a project reduces to zero.

Front 61

Sensitivity analysis formula

Back 61

NPV of project/ PV of cash flows affected by the estimate

Front 62

Simulation

Back 62

Assess the impact of more than one veritable at a time. Employs random numbers to generate multiple different NPVs to get a distribution. Assumes variables are uncorrelated.

Front 63

Value at risk

Back 63

Measure of how much the market value of asset portfolio is likely to decrease over time under normal market conditions.

Front 64

VaR formula

Back 64

Standard deviation*time^1/2*confidence interval

Front 65

Derivative

Back 65

An asset whose value depends on an underlying asset. Not fixed in volume since their creation depends on existence of counterparties.

Front 66

Counter party credit risk

Back 66

You make a profit on your derivative, the corollary makes a loss but then defaults in paying you your profit.

Front 67

How to manage counter party credit risk

Back 67

having the clearing house act as the official counter party for every transaction

Front 68

marking to market

Back 68

Daily profit or loss added or subtracted from margin account