Question

1. What determines the confidence level used by a AA‐rated financial institution in its economic capital calculations?

2. What types of risk are included in business risk?

Answer 1

2. Types of Risk included in Business Risk are-

Risk, in the context of business or Financial world may be defined as the uncertainty associated with an investment.
Now, There are a number of risks a business organisation is exposed to, they can be put under 2 broad categories.

Systematic Risk & Unsystematic Risk.

Business risk falls under the Second category i.e. Unsystematic Risk.

Business risk basically comes from the operational activities of the business. Due to certain inbuilt deficiencies in the operations of a company, its competitive advantage over the rivals is lost affecting the force of its expansion and/or smooth flow of revenue. This fact is ultimately expressed in the form of poor ''Operating Income'' and '' Expected Dividends" of the company.

Business Risk may arise due to internal causes or external causes. Hence it is further categorised under two heads:

INTERNAL BUSINESS RISK & EXTERNAL BUSINESS RISK

1) Internal Business Risk is related to the operational effectiveness of a company, which is measured in terms of the level of its targeted achievements and keeping the promises made to its investors. Operational effectiveness varies from company to company, and is influenced by the following factors.

Sales Variation, Research and Development, Personnel Management, Fixed Cost and Single Product.

2) External Business Risk is the risk caused by the circumstances, which are external to a company's business. The company has no control over these circumstances or factors, which are Social and regulatory factors, Monetary Policy of the Central Bank of the Country, Fiscal Policy of the Govt., Business Cycle, General Economic Conditions.