Homework 1

TECH 638 Risk Management

50 points

Due on 14th of September 2014

Chapter 1: Page 13
1. Describe how the scope of risks encompassed in enterprise risk management differs from those
of traditional corporate risk management.
Traditional corporate risk management had a focus on pure risks only, mainly those things that
could be insured. Enterprise risk management has a broader scope, taking into consideration
financial risks, operational risks, and strategic risks.
2. Describe the difference between pure and speculative risks. Provide an example of each.
Pure risks involve only the possibility of loss. Examples are loss of a building to fire or the
premature death of a family head. Speculative risks involve the possibility of gain as well as loss.
Examples are gambling, investing in the stock market, and starting a business.
3. Describe the process of risk diversification, noting the two conditions that must exist for
diversification to be effective.
Risk diversification involves spreading the losses in a group among all the members of the
group. There must be a large number of members, and the potential that a loss will affect more
than a few members of the group at one time must be small.
4. List and briefly describe the five steps in the risk management process.
1) Formulate risk management objectives. What do you want to achieve through risk
management efforts?
2) Identify loss exposures. What is at risk, and what perils and hazards are related?
3) Measure potential loss severity. Most risk-management efforts, and dollars, are
going to be directed to the exposures with the greatest potential severity.
4) Choose risk-handling techniques. What strategies will be best to deal with the
identified exposures?
5) Implement techniques and monitor their effectiveness. Did what we chose work as
we expected? Was it cost effective?
5. Describe four different types of risk that need to be addressed by the risk manager in a typical
corporation. Discuss whether each of these four types of risk are equally important across
different industries.
1) Pure risksthose where only loss is possible
2) Financial riskssuch as currency exchange risk
3) Operational riskssuch as supply chain exposures or critical dependencies
4) Strategic riskssuch as product development and construction delays
No, these are not equally important across different industries. For an importer, currency
exchange risk might be the most significant exposure. For a local restaurant, this is unlikely to
be a problem.

Chapter 2: Page 28
6. Provide an example of an internal and external risk for a large automaker.
An internal risk for the automaker is possible damage to, or destruction of, their
production facilities. An external risk is possible problems with their various parts
suppliers. The Japanese tsunami of 2011 caused production delays at the U.S. plants of
Japanese automakers because parts could not be shipped from Japan.

7. Provide two examples of situations in which risk managers are concerned

about damage to the property of others. A firm might be a bailee, holding the
property of others in the course of their business, e.g., a storage warehouse, or the firm
might lease property, such as computers and copiers, and be required by contract to
insure that property.
8. Define and provide two examples of tangible and intangible property.
Tangible property includes all things with a physical presence, such as buildings and
personal property. Intangible property does not have a physical presence. Examples
include trademarks and patents, and in an ERM context, supply chains.
9. What is price risk? In your answer, describe the difference between input
costs and output costs. Price risk involves changes in the costs of inputs or the price
at which a firm can sell its products. Input costs are the costs of raw materials and
other production inputs. Output costs are the prices at which a firm can sell its goods
or services.
10. Explain why failures of accounting systems can be considered a financial
risk or an operational risk in two different organizations. A failure of
accounting systems might be considered a financial risk in a situation where a firm
failed to account carefully for its input costs, leading to faulty pricing decisions. A
failure of accounting systems might be considered an operational exposure when
failure to detect business crime, e.g., embezzlement, hampered the firms operations.