Question

Indicate which of the following types of risk is represented by the statements below:

            (ERM Appendix 1.1)

           

            Types of Risk:

Market Risk                             (M)

Credit Risk                              (C)

                                    Liquidity Risk                          (L)

                                    Operational Risk                     (O)      

                                    Legal and Regulatory Risk     (LR)

                                    Business/Strategic Risk          (B)

                                    Strategic Risk                          (S)

                                    Reputation Risk                      (R)

1.         ________        A firm may not be able to raise the necessary cash to roll over its debt.

2.         ________        A trader takes excessively large positions and supervisors do not detect this due to faulty controls.

3.         ________        An investor buys shares in a company because he/she expects the value of the shares to increase but the price of the shares falls.

4.         ________        A manufacturing firm introduces a promising new product. However, not many consumers want to buy the product.

5.         ________        A firm is found to be contributing insufficient funds to its employees' pension plan. As a result, workers picket the firm, customers refuse to buy its                                      products, and the government begins an investigation.

6.         ________        An investment firm buys $10,000,000 of the bonds of a corporation. However, after two years the issuer of the bonds defaults on the bond,                                               failing to pay interest or principal.

7.         ________        A firm judges that a newly identified market segment – 60-year old gamers – will not be a strong market, so it does not target that segment in its                                          marketing. Its competitors target that segment which turns out to be highly lucrative for them.

Answer 1

• Market risk: It is commonly known as systematic risk, where the investor experiences losses because of the overall performance of the financial markets.
• Credit risk: It is risk of default on the debt which arises when a borrower fails to make payment.
• Operational risk: It is the risk which occurs due to loss resulting from the failure of system, procedure or policies.
• Regulatory risk: It is risk of change because of the laws and regulations which affect the business.
• Strategic risks: Risks that are developed by some strategic objective.
• Business risk: Risk due to lower profits than expected.
• Reputational risk: Risk of loss which results from damage or firms reputation.
• Liquidity risk: Risk arising due to financial losses.

• Funding Liquidity risk: - A firm may not be able to raise the necessary cash to roll over its debt.
• Operational risk: -A trader takes excessively large positions and supervisors do not detect this due to faulty controls.
• Strategic risk: -An investor buys shares in a company because he/she expects the value of the shares to increase but the price of the shares falls.
• Business risk: -A manufacturing firm introduces a promising new product. However, not many consumers want to buy the product.
• Legal and regulatory risk: -A firm is found to be contributing insufficient funds to its employees' pension plan. As a result, workers picket the firm, customers refuse to buy its products, and the government begins an investigation.
• Credit risk: -An investment firm buys $10,000,000 of the bonds of a corporation. However, after two years the issuer of the bonds defaults on the bond failing to pay interest or principal.
• Reputational risk: -A firm judges that a newly identified market segment – 60-year old gamers – will not be a strong market, so it does not target that segment in its marketing. Its competitors target that segment which turns out to be highly lucrative for them.