risk management today
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TRANSCRIPT
Risk Management Today
4th Session
The Changing Scope of Risk Management
A. Financial Risk Management
Three financial risks that a Risk Manager may consider are commodity price risks, interest rate risk, and currency exchange rate risk. Traditionally, such risks were not considered in Risk Management.
The Changing Scope of Risk Management
Commodity Price Risk
This is the risk of losing money if the price of a commodity changes. Examples of commodities are: Oil, Gold, Copper, Coffee, Orange Juice, Pork Bellies!
The Changing Scope of Risk Management
Interest Rate Risk
Interest rate risk is the risk of loss caused by adverse interest rate movements. This is particularly significant in relation to corporate loans and general debt levels in society as a whole.
The Changing Scope of Risk Management
Currency Exchange Rate Risk
Is the risk of loss of value caused by changes in the rate at which one nation’s currency may be converted to another nation’s currency.
The Changing Scope of Risk Management
Managing Financial Risks
The traditional separation of Pure and Speculative risks meant that different business departments addressed these risks. However, during the 1990s, some businesses began taking a more holistic view of the pure and speculative risks faced by the organization, hoping to achieve cost savings and better risk treatment solutions by combining coverage for both types of risk.
The Changing Scope of Risk Management
B. Enterprise Risk Management
Encouraged by the success of financial risk management in the 1990s, a few organizations are considering the next logical step.
Enterprise risk management is a comprehensive risk management program that addresses an organization’s pure risks, speculative risks, strategic risks and operational risks. It is a much broader concept than that of traditional risk management, which is limited in scope to considering the pure risks of: property, liability and personnel loss exposures.
The Changing Scope of Risk Management
B. Enterprise Risk Management
We have already defined Pure and Speculative risks. The additional elements in ERM of Strategic Risks and Operational Risks can be defined as follows:
Strategic Risks: Refers to uncertainty regarding the organization’s goals and objectives, and the organization’s strengths, weaknesses, opportunities, and threats (SWOT).
Operational Risks: These are risks that develop out of business operations, including such things as manufacturing products and providing services to customers.