Question

• Based on the information you learned this week, what approach would you take in explaining how systematic and unsystematic risks affect risk planning?
• Describe your approach.
• Name 3 or more systematic or unsystematic risks your company might face.

Answer 1

RISK

• Risk is a condition in which there exists a quantifiable dispersion in the possible outcomes from any activity.
• Risk is 'the chance of something happening that will have an impact on objectives'.
• Trading risk is divided into two general categories:

(1) Systemic risk

• It affects all securities in the same class and is linked to the overall capital-market system and therefore cannot be eliminated by diversification.
• "Systemic risk" is said to arise when the failure of one big player or of one clearing corporation somehow puts all other clearing corporations in the economy at risk.
• systemic risk is uncontrollable by an organization
• It is macro in nature

Types of Systemic risk

Interest rate risk

It relates to the risk of reduction in the value of a security due to changes in interest rates.

Market risk

Market risk refers to the sensitivity of an asset or portfolio to overall market price movements such as interest rates, inflation, equities, currency and property.Market risk is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets in which he is involved

Purchasing power or inflation risk.

It is the risk that general increases in prices of goods and services will reduce the value of money, and likely negatively impact the value of investments. Inflation reduces the purchasing power of money and therefore has a negative impact on investments by reducing their value. This risk is also referred to as Purchasing Power Risk.

(2) Unsystematic risk

• Any risk that isn't marketrelated or is not systemic. Also called non market risk, extra-market risk, or unsystemic risk.
• It is a portion of total risk that is unique to the industry or firm. Factors such as management capability, consumer preferences and labour strikes can cause unsystematic variability of returns for a company stocks.
• It is controllable by an organization
• It is micro in nature

Types of Unsystemic risk

Business or liquidity risk

It relates to the risk of not being able to buy or sell investments quickly for a price that tracks the time underlying value of the asset.

Credit risk

Credit Risk also called default risk, is the chance that a bond issuer will fail to make interest payments or to pay back your principal when your bond matures.

Operational risk

It is the business process risks failing due to human errors or mistakes.This risk will change from industry to industry. Operational risk occurs due to breakdowns in the internal procedures, people, policies and systems.

Risk Planning

Risk Planning is A process of understanding and managing the risks that the entity is inevitably subject to in attempting to achieve its corporate objectives.

Approaches of risk planning

1. SWOT Analysis
2. Delphi technique
3. Brainstorming
4. Check Lists
5. Assumption Analysis
6. Documentation reviews

By using these techinques or approches, we can determine how much a Systemic risk and unsystemic risk effect the company.