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Risk Management - Case Study Example

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Summary
Risk can be thought of as the chance of an event turning out in a way that makes you worse off. However, not everyone views the same set of circumstances as being equally risky. Some folks are naturally more optimistic, while others it seems are always looking for the worst possible outcome to happen…
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Risk Management Case Study
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Download file to see previous pages Risk management is the practice of managing the resources of the operation in such a way as to maintain an acceptable level of risk. This in turn should generate a corresponding level of return that will allow the goals of the operation and management to be achieved. The use of time, financial and other resources to effectively manage the risks so that goals can be achieved is the risk management. Risk management comprises of risk assessment and risk control. Assessing Risk is identifying and analyzing risk. Controlling Risk is taking steps to reduce risk, provide contingency, monitor improvements. Risk Management is important for ensuring that a computer project isn't scuppered, preventing accidental loss or disclosure of information, avoiding computer fraud, hacking, ensuring the smooth running of an information system and maintaining your career prospects.
Sources of Risk: There are five main sources of risk in an operation: production risk, marketing risk, financial risk, legal risk and human resource risks. Production risks include yield and quality variability. Marketing risks include changes in the price and external conditions. Financial risks include variability in debt, equity capital and ability to meet cash demands. Legal risks include responsibilities for contracts, statutory compliance, tort liability and business structure. Human Resource risks include people management and estate transfer.
Types of Risk: There are two types of risk that affect the volume of investment. The first is the entrepreneur's or borrower's risk which arises out of doubts in his own mind as to the probability of his actually earning the prospective yield for which he hopes. This is a real social cost, though susceptible to diminution by averaging as well as by an increased accuracy of foresight. If a man is venturing his own money, this is the only risk which is relevant. But when a system of borrowing and lending exists, which means the ranting of loans with a margin of real or personal security, a second type of risk is relevant which we may call the lender's risk. This may be due either to moral hazard, i.e. voluntary default or other means of escape, possibly lawful, from the fulfillment of the obligation or to the possible insufficiency of the margin of security, i.e. involuntary default due to the disappointment of expectation. This is a pure addition to the cost of investment which would not exist if the borrower and lender was the same person. Moreover, it involves in part a duplication of a proportion of the entrepreneur's risk, which is added twice to the pure rate of interest to give the minimum prospective yield which will induce the investment.
For if a venture is a risky one, the borrower will require a wider margin between his expectation of yield and the rate of interest at which he will think it worth his while to borrow; whilst the very same reason will lead the lender to require a wider margin between what he charges and the pure rate of interest in order to induce him to lend (except where the borrower is so strong and wealthy that he is in a position to offer an exceptional margin of security). During a boom the popular estimation of the magnitude of both these risks, both borrower's risk and lender's risk, is apt to become unusually and imprudently low.
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