Tutorial 2

Types of Risk
What is Risk ?
• Risk implies the extent to which and
chosen action or an inaction that may
lead to a loss or more unwanted
outcomes. The concept implies that a
choice may have an influence on the
outcome that exists and anything that
threatens a company's ability to achieve
its financial goals is considered a risk.

• The probability that some event will

cause an undesirable outcome on the
financial health of your business.
In finance , different types of risks
can be classified, lets take a look at
the two basic types of risks
 Systematic Risk
— Systematic risk is due to the influence of
external factors on an organization. Such
factors are normally uncontrollable from an
organization's point of view.
— It is a macro in nature as it affects a large
number of organizations operating under a
similar stream or same domain. It cannot be
planned by the organization.
— E.g. Interest rate risk , Market risk , currency
rick , political , natural disasters, earthquakes
and inflation
 Unsystematic Risk
— Unsystematic risk is due to the influence of
internal factors prevailing within an
organization. Such factors are normally
controllable from an organization's point of
view.
— It is a micro in nature as it affects only a
particular organization. It can be planned, so
that necessary actions can be taken by the
organization to mitigate (reduce the effect
of) the risk.
— E.g. Business risk / Liquidity risk , Financial
risk/credit Risk, Operational Risk
Major types of Risks:

Currency ( Exchange rate ) risk :

- currency or exchange rate risk is a form of
risk that arise from the change in price of
one currency against another.
- possible high fluctuations of currency may
affect the profits.
- when price of inputs increase , the prices of
output increases too so if the product is
necessity the company will transfer the
increase in price to customer, but if
customers wont pay the increased price the
company will lose
Interest rate risk
- Fixed interest rate is fixed even if the
interest rate changes but variable interest
rate risk can be change according to
central bank’s regulations
- The risk that changes to interest rate will
disrupt your business, for example ,
interest rates may increase your cost of
capital thus impacting your business
profitability.
- Higher interest rate increase the value of
the fund which will be reflected as an
increasing in prices, during this situation
companies may face 2 options:

1) company will make profit if it is able to transfer

this change in cost to the customers and the
customers are able to pay these prices.

2) company will lose if it cannot transfer the

increase in costs to customers because
customers are not willing to pay higher prices.
Inflation risk
- is the rate at which the general level of prices for
goods and services is rising and, consequently, the
purchasing power of currency is falling. Central
banks attempt to limit inflation, and avoid
deflation, in order to keep the economy running
smoothly.
- Inflation is the rise in product’s prices due to :
v Decrease the quantity suppliers
v Increasing in the cost of production
v Increase in demands
- Inflation risk affects companies as the price
of raw materials increases so the company
will increase its prices to keep its profit
margin. Companies may face 2 options:
1) company will make profit if its able to
transfer this change in cost to the customer
and the customers are able to pay these
higher prices.
2) company will lose if it cannot transfer this
increase in costs to customer because
customers are not willing to pay higher
prices.
Business Risk / liquidity Risk
-Business risk is the possibility a company
will have lower than anticipated profits or
experience a loss rather than taking a
profit. Business risk is unsystematic risk
it is influenced by numerous factors,
including sales volume, per-unit price,
technological changes and competitions
- It may cause bankrupts or unable to pay
its debts or interests
Financial Risk /Credit Risk

— Financial risk is also known as credit risk. It arises due to

change in the capital structure of the organization.

— Financial risks can occur when a company doesn't perform

debt management or financial planning tasks. Market changes
or losses can threaten a company's financial standing.

— Here are a few types of financial risks for businesses:

— Default risk: Taking out a business loan with greater
interest than a company can afford can put a company at risk
of defaulting, or not paying, the loan.
— Liquidity risk: A company faces a liquidity risk when it can't
quickly convert its assets into cash.
Operational Risk
— Operational risks can be internal, external, or a combination of
both. Examples of operational risks include a natural disaster that
damages your physical premises or equipment, a pandemic that
forces people to shelter in place or work from home, or a server
outage that causes technical problems like lack of power or
disrupted internet connectivity.

— Internal business risks are often related to human error, such as

an accountant entering the wrong payment amount or a developer
inputting the wrong code.

— Here are a few specific types of operational risks in business:

— Employee errors: A business can experience a threat to its
operations if employees make significant mistakes at work.
— Damage to assets: A natural disaster can damage a company's
physical assets, which is an operational risk.
— External fraud: When a company experiences external fraud such
as a theft by a third party, the theft poses an operational risk to the
company
Political risk
- If the political situation in the country is not
stable the investors will decrease their
investments which can lead to decrease in
production , increasing unemployment and
decreasing taxes paid to the governments
- For example: The Egyptian revolution or in Iraq if
an investor invests his money in Iraq, he will face
huge political risks as the country is unstable so it
will increase the business risk
- In countries where political risk is high, investors
may find it difficult to sell their investments so
they will be forced to sell their investment at a
lower market value
Strategic risk
— Strategic risk refers to the internal and external
events that may make it difficult, or even
impossible, for an organisation to achieve their
objectives and strategic goals and it is the possible
losses a business may suffer based on decisions
made at the strategic level
— such risk can have severe consequences that
impact organisations in the long term and
organization’s future position.
Different types of strategic

Competitive risk. The risk is that you fall behind your competitors as
they innovate and improve their offerings faster than you.
Regulatory risk. Any new regulation has the potential to:
1. Disrupt your business
2. Create new responsibilities
3. Demand new technologies (and therefore linking back to change risk)
Reputational risk Reputational damage is the loss to financial capital,
social capital and/or market share resulting from damage to a firm's
reputation.
Political risk is the risk an investment's returns could suffer as a result
of political changes or instability in a country
Financial risk is the Risks relating to the financial health of the
organization.
Operational risk is the risk that your operations and business
processes are not up to standard.
Technology risk
Technology risk is any potential for technology
failures to disrupt your business such as information
security incidents or service outages.
— Common Technology Risks : Cyber attacks,
Data breaches , Old equipment..etc
Regulations:
- If there is a law in the country that the
government has the right to nationalize
companies , this will make investors afraid to
invest their money in this country because their
investments might be take from them
Foreign affairs:
- If the country has bad relations with the other
countries , investors won’t invest in this country
Wars and invasion
- If there is a war in a country , investors will be
afraid to invest their money in the country
Unforeseeable risk: Unforeseeable risk is the type of
risk that cannot be accurately forecast before it
occurs. Such as natural disasters, earthquakes ,
hurricanes...etc
 Quick True or false Questions
1) Systematic risk is due to the influence of internal factors on
an organization. Such factors are normally controllable from an
organization's point of view . T or F
The Answer is…
False ( external factors/ Uncontrollable)
2) Systematic risk is macro in nature as it affects a large number
of organizations under same domain. T or F
The Answer is…
True
3) Unsystematic risks are controllable by an organization's.
T or F
The Answer is…
True
4) Unforeseeable risk is considered as unsystematic risk . T or
F
The Answer is…
False (systematic risk )
5) Interest rate risk is a form of risk that arise from the
change in price of one currency against another T or F
The Answer is…
False (Currency Exchange risk )

6) Inflation risk occurs when the quantity of suppliers increases

and the cost of production decreases.T or F
The Answer is…
False (Inflation risk occurs when the quantity of suppliers
decreases and the cost of production increases)
 7) Higher interest rate increases the value of the fund and will lead
to lower product price .T or F
The Answer is…
False (Increasing in prices )
8) Natural disasters and earthquakes are considered as systematic
risk .T or F
The Answer is…
True
9) When the price of inputs increases, the process of outputs
decreases.T or F
The Answer is…
False (The outputs increases as well )
10) Operational risks are the business process risks failing due to
human errors.T or F
The Answer is…
True