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Risk Management
By:
Published: September 29, 2006
Any decision where you choose one thing over another involves risk. Companies that rely on their choices to make a profit, however, must carefully assess the risk involved in their decisions and attempt to “manage” it.
How do you manage risk? Of course there is no sure way to eliminate risk, but there are ways to lessen overall risks, or the accumulation of all the risks involved in a series of decisions.
When attempting risk management, first figure out the all the risks involved in certain choices so you can compare. Then apply a balance system, where if one decision is “risky,” another decision should be less “risky” to balance the risk to an acceptable level when you average the two.
While this provides a basic way to understand risk management, the system can become much more complex in the business world. Complicated software, carefully trained experts and historical patterns help to inform risk management techniques.
Types of Risk
Credit Risk: Credit risk has to do with investment, whether it is investing the company’s money in some type of outside market (stock market, real estate market) or managing incoming investment. Managing the company’s investments used to be a company’s main type of risk management. While it is still an important factor in risk management, it now is one of several types of risk evaluated to keep the company economically healthy.
Operational Risk: Operation risks include the impending risk of a natural disaster, power outage, fraud or electronic failure. These risks are unable to be controlled, or sometimes even predicted, but should still be considered when determining possible overall risks. This type of risk management is a relatively new field.
Market Risk: This risk has to do with the specific economic environment of a business (agriculture versus retail versus computers, for example). In larger and more mature markets (markets where new products and companies have slowed and most demand is being served effectively) this type of risk is easier to determine and predict because the market has been around for a while and patterns have been observed. In smaller, newer markets (developing a new type of drug, or introducing a new electronic technology, for example) where the market risk function is part of the asset and liability management process, risk is more difficult to manage
Sources:
http://www.rmahq.org/RMA/
http://www.rmahq.org/RMA/CreditRisk/
http://www.rmahq.org/RMA/OperationalRisk/
http://www.rmahq.org/RMA/MarketRisk/
http://en.wikipedia.org/wiki/Risk_management
http://advantage.hanleywood.com/default.aspx?pag e=article239
http://www.coso.org/publications.ht
How do you manage risk? Of course there is no sure way to eliminate risk, but there are ways to lessen overall risks, or the accumulation of all the risks involved in a series of decisions.
When attempting risk management, first figure out the all the risks involved in certain choices so you can compare. Then apply a balance system, where if one decision is “risky,” another decision should be less “risky” to balance the risk to an acceptable level when you average the two.
While this provides a basic way to understand risk management, the system can become much more complex in the business world. Complicated software, carefully trained experts and historical patterns help to inform risk management techniques.
Types of Risk
Credit Risk: Credit risk has to do with investment, whether it is investing the company’s money in some type of outside market (stock market, real estate market) or managing incoming investment. Managing the company’s investments used to be a company’s main type of risk management. While it is still an important factor in risk management, it now is one of several types of risk evaluated to keep the company economically healthy.
Operational Risk: Operation risks include the impending risk of a natural disaster, power outage, fraud or electronic failure. These risks are unable to be controlled, or sometimes even predicted, but should still be considered when determining possible overall risks. This type of risk management is a relatively new field.
Market Risk: This risk has to do with the specific economic environment of a business (agriculture versus retail versus computers, for example). In larger and more mature markets (markets where new products and companies have slowed and most demand is being served effectively) this type of risk is easier to determine and predict because the market has been around for a while and patterns have been observed. In smaller, newer markets (developing a new type of drug, or introducing a new electronic technology, for example) where the market risk function is part of the asset and liability management process, risk is more difficult to manage
Sources:
http://www.rmahq.org/RMA/
http://www.rmahq.org/RMA/CreditRisk/
http://www.rmahq.org/RMA/OperationalRisk/
http://www.rmahq.org/RMA/MarketRisk/
http://en.wikipedia.org/wiki/Risk_management
http://advantage.hanleywood.com/default.aspx?pag e=article239
http://www.coso.org/publications.ht
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