Question

Select three of the following risk categories. Provide definitions and examples.

Strategic Risks

Insurance Risks

Market Risks

Credit Risks

Liquidity Risks

Operational Risks

Reputation Risks

Answer 1

Credit risk is defined as the one that results from the failure of a party in the debt to repay the loan amount or meet contractual obligations. In the traditional sense, it is a risk of not receiving the owed principal and interest. It usually results in an interruption of cash flows and leads to increase costs for collection. For example, a bank provides the loan to farmers, but they are unable to repay.  

Operational risk is defined as the one that usually results from failed or inadequate procedures, policies or systems. It is the risk that disrupts the process or operation of a company. It is one of the most critical risks that sometimes puts the company on survival mode. For example, a financial scam because of the irregularities in the financial statement.

Reputational risk is defined as the one that affects the reputation of the company. It leads to the loss of financial capital, social capital or loss of market share. It is generally measured in lost revenue or destruction of shareholder value. For example, poor quality products or unethical practices.