Introduction to Risk Management Plan Assignment

Assignment Task

Learning objectives

• Be able to define risks in finance
• Be able to categorize different types of risks
• Be able to explain the risk management process

Risk

Risk is the likelihood of something happening and the severity of its consequences. How is risk different from uncertainty?

Market Risk – Tesco Case Study

Have a look at Tesco 2021 Annual Report (page 159 – page 166), find out which types of market risks that Tesco Group is exposed to, how could Tesco Group manage these risks?

Credit Risk – Concepts

Credit risk is the risk of an economic loss from the failure of a counterparty to fulfil its contractual obligations, or from the increased risk of default during the term of the transaction

Liquidity Risk – Concepts & Issues

Liquidity risk comprises both “funding liquidity risk” and “trading liquidity risk”. Funding liquidity risk relates to a firm’s ability to raise the necessary cash to roll over its debt; to meet the cash, margin, and collateral requirements of counterparties; and to satisfy capital withdrawals. Can we pay our bills, can we fund our liabilities?”

Trading liquidity risk is the risk that an institution will not be able to execute a transaction at a fair price because there is, temporarily no appetite for the deal on the other side of the market. An asset cannot be sold due to lack of liquidity in the market ” What type of business would be most vulnerable to liquidity risk?

Banks are particularly vulnerable to Liquidity Risk as their business model essentially involves borrowing and lending. Insurers also need liquidity to meet claims arising.

Operational Risk – Concepts

While the definition of Credit Risk as a failure of a counterparty to honour obligations may include the failure of a lender to honour a line-of-credit, this system treats this as a Liquidity Risk.

Operational risk refers to potential losses from a range of operational weaknesses including inadequate systems, management failure, faulty controls, fraud, and human errors

Strategy Risk – Concepts

Strategy risk refers to the risk of significant investments for which there is high uncertainty about success and profitability. It can be also related to a change in the strategy of a company vis-a-vis its competitors.

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