Risk

L1- Risk and risk management

Risk is the essence of free enterprise in liberal economies. The diversity of risks is unlimited and

multiplied by an unlimited diversity of ways in which those risks might impact and combine.

When venturing into business or managing finance or a country’s area of risks, it is inevitable

that risks are ever present.

“There is the risk you cannot afford to take and there is the risk you cannot afford not to take.

“Peter Drucker”

The only constant in life is change and with change comes uncertainty and risks

The Basis of risk: identification

i) Standard definition,” to danger or hazards”. Risk is the chance that an investment’s actual return will be different than the expected or the element of uncertainty. Investors tend to emphasize the negative aspect that risk carries the possibility of losing some or all of the original investment

ii) Risk is the uncertainty surrounding events and their outcomes that may have a significant effect on activities. All activities carry some risk arising either from potential threats or the non-realisation of opportunities which may harm, prevent, hinder or interfere with the achievement of business objectives.

iii) Better definition, the Chinese (character – “Fong Xian) version –Risk is a mix of danger and opportunities. It is neither good nor bad and is neither to be avoided nor sought but carefully balanced.

Risk management helps banks navigate the VUCA world- short for volatility, uncertainty, complexity, and ambiguity

Volatility- the challenge is unexpected or unstable and may be of unknown duration

Uncertainty – Despite a lack of other information, the event’s basic cause and effect are known

Complexity –the situation has many interconnected parts and variables

Ambiguity – casual relationships are completely unclear. No precedent exists.

Definition of risk management

Since Risk management is generally defined as forecasting and evaluating financial risks to avoid...