Risk analysis seeks to identify, measure and mitigate various risk exposures or hazards facing a business, investment or project
Quantitative risk analysis uses mathematical models and simulations to assign numerical values of risk
Meaning of Risk Analysis
Risk analysis involves examining how project outcomes and objectives might change due to the impact of the risk event
Once the risks are identified, they are analysed to identify the qualitative and quantitative impact of the risk on the project so that appropriate steps can be taken to mitigate them
Types of Risks
1) Value at Risk VaR is a risk metric used to statistically estimate the likelihood that a trading portfolio will incur a maximum potential loss, within a specific period, and at given probability confidence level
2) Mark to Market MtM refers to a valuation process where open positions are marked to forward market prices, thereby establishing the unrealized profit and loss potential of the opportunity created by the trader
3) Counterparty Credit Exposure It is customary to estimate Counterparty current credit exposure, subject to netting provisions, on a daily basis and track progression on counterparty credit limit usage for risk control purpose
4) Counterparty Collateral Requirements It must be assessed in a bilateral manner, so as to adequately and simultaneously track both inbound and outbound counterparty margin calls
5) Cost of Credit It will be prudent for management to assess daily credit charges on trades put on by traders to recoup the cost of credit, the credit spread must be adjusted to reflect the underlying time horizon, which is daily in this narrative
6) Hedge Effectiveness Test It establishes a company’s ability to elect hedge accounting for reporting financials and to claim exemption from clearing of OTC trades, where hedges are indeed producing the intended or desired results
7) Stress Testing It involves assessing the impact of significant changes in price, volatilities, and correlations on MtM and VaR measures
Quantitative Risk Analysis
1) a risk model is built using simulation or deterministic statistics to assign numerical values to risk
2) inputs that are mostly assumptions and random variables are fed into a risk model
3) for any given range of input, the model generates a range of output or outcome
4) the models output is analyzed using graphs, scenario analysis, and/or sensitivity analysis by risk managers to make decisions to mitigate and deal with risks
5) a Monte Carlo simulation can be used to generate a range of possible outcomes of a decision made or action taken
6) the resulting outcome from each input is recorded and the final result of the model is a probability distribution of all possible outcomes
7) separating the different outcomes from best to worst provides a reasonable spread of insight for a risk manager
8) other types of risk management tools include decision trees and break-even analysis
Qualitative Risk Analysis
1) it is an analytical method that does not identify and evaluate risks with numerical and Qualitative ratings
2) it involves a written definition of the uncertainties, and evaluation of the extent of the impact (if the risk ensues), and countermeasure plans in the case of a negative event occurring
3) qualitative risk tools includes SWOT analysis, cause and effect diagrams, decision matrix, game theory etc
4) qualitative risk technique help to prepare it for any lost income that may occur from a data breach
Benefits of Qualitative Risk Analysis
1) easy presentation
2) simple assessment methods
3) easy prioritization
4) no need to determine frequency
5) no need to quantify the impacts of costs and schedule
Advantages of Risk Analysis
1) recognise and control hazards in your workplace
2) create awareness among your employees – and use it as a training tools as well
3) set risk management standards, based on acceptable safe practices and legal requirements
4) reduce incidents in the workplace
5) save costs by being proactive instead of reactive
Limitations of Risk Analysis
1) variations in individual and species tolerances to the effect of contaminants
2) environmental conditions and processes affecting the properties of the contaminants such as partitioning, transformation, degredation, temperature, pH, organic material etc
3) large information gaps
4) uncertainties in extrapolating study data
Risk management benefits
1) it’s easier to spot projects in trouble
2) there are fewer surprises
3) there’s better quality data for decision making
4) communication is elevated
5) budgets rely less on guesswork
6) the expectation of success is set
7) the team remains focused
8) escalations are clearer and easier
Disadvantages of Risk Management
1) complex calculations
2) training required
3) motivation needed
4) ambiguity
5) depends on external entities
6) mitigation
7) difficulty in implementing
8) potential threats
Risk Matrix
It is matrix that is used during risk assessment to define the level of risk by considering the category of probability or likelihood against the category of consequence severity
This is a simple mechanism to increase visibility of risks and assist management decision making
Creation of Risk Matrix
1) list down risks that the participants can think of
2) rate of probability and impact
3) classify the risks
4) decide on mitigation planning
Control options for risks
1) Termminate (avoid/ eliminate)
2) Treat (control/reduce)
3) Transfer (insurance/contract)
4) Tolerate (accept/retain)
Creation of business risk plan
1) create and protect value
2) be an integral part of each organisational process
3) be part of decision making
4) explicitly address uncertainty
5) be systematic, structured and timely
6) be based on the best available information
7) be tailored
8) take into account human and cultural factors
9) be transparent and inclusive
10) be dynamic, iterative and responsive to change
11) facilitate the continual improvement of organisations
