Question

Business risk is comprised of (a) price risk, (b) credit risk and (c) pure risk Defined these terms and give an example of each.

Answer 1

Conducting business is risky due to the fact that the environment in which it operates is dynamic in nature and keeps on changes, it is never static. Some of the key risk are price risk, credit risk and financial risk, these can be defined as follows:

• Price risk: It refers to the risk of price volatility in some of the essential commodities on which business is based upon, for example an oil producing company faces the risk of oil prices volatility which directly impacts profit as well as losses of the organization.
• Credit risk: It refers to the risk of loss of credit which is owed by the company with others. For example, the risk of trade receivables, due to reasons beyond control of the organization, such credit may not be paid by the debtors which creates a credit risk for the organization.
• Pure risk: It refers to the risk that can only result in losses to the company, usually such risk are those which is caused due to natural factors like earthquake, bad weather, fire etc.