I.

ELEMENTS OF RISK MANAGEMENT

 All risks must be properly handled because we need to consider na may mga risks with high probability of occurrence but
lower loss and a risk with high loss but lower probability of occurrence.
 That is why the following elements of risk management are fundamental in the process of identifying, assessing, and
managing risks to enhance the security and resilience of organizations and systems.

A. identification, characterization, and assessment of threats

- This involves recognizing and understanding potential threats to a system, organization, or project. Dito
nakapaloob yung pag-define ng nature, scope, and characteristics ng mga threats and assessing their
potential impact sa organization.
B. assessment of the vulnerability of critical assets to specific threats
- After ma-recognize and maintindihan yung mga potential threats, sa step namang ito, it involves
evaluating the susceptibility of critical assets (e.g., data, infrastructure, personnel) to specific threats
because it helps determine how easily these assets could be compromised or harmed.
- For example in a manufacturing company, there should be an evaluation on how likely their manufacturing
equipment is to physical damage like natural disasters or accidents and kung paano ito makakaapekto sa
production ng company.
C. determination of the risk (i.e. the expected likelihood and consequences of specific types of attacks on specific
assets)
- Risk assessment combines the expected likelihood and consequences of specific types of attacks on
specific assets. This quantifies the overall risk level, providing a clear understanding of the potential harm
and its probability.
- Ex: When determining risk in investment, it must involve assessing the likelihood and consequences na
magkaroon ng stock market crash that might affect a particular stock. The risk could be high if the
company is heavily dependent on the stock market for funding.
D. identification of ways to reduce those risks
- After understanding the risks, strategies are developed to mitigate or eliminate them. This includes the
identification of security measures, protocols, or safeguards that can reduce the likelihood or impact of
threats.
- Ex: Example, sa isang construction project, identifying ways para ma-reduce ang risk of delays due to
weather might involve yung pagpaplano na gawin ang construction during favorable seasons and this also
involves usage of weather-resistant materials, or having contingency plans in place for rain delays.
E. prioritization of risk reduction measures based on a strategy
- Once risk reduction measures are identified, they need to be prioritized. This prioritization is based on a
risk management strategy that outlines which risks are most critical and how resources should be
allocated to address them effectively.
These elements work together to create a structured and proactive approach to managing risks, which is essential for the
success and sustainability of organizations and projects.
II. RELEVANT RISK TERMINOLOGIES
 Typically refers to a set of terms, jargon, or terminology used in the context of risk management and assessment that are
interconnected or associated with one another.
 Itong mga terms na ito are often used to describe different aspects and components of risk, and understanding them is
crucial for effective risk analysis and mitigation.
 There are 3 main classifications of these terminologies na related sa risk which are:
- Risk Associated with Investments
- Risk Associated with Manufacturing, Trading and Service Concerns
- Risk Associated with Financial Institutions
 Risks Associated With Investments
There are numerous factors na nagko-contribute sa investment uncertainty. The factors usually considered with respect to
investments are:
 Business risk - this risk refers to the uncertainty about the rate of return caused by the nature of the business.
- refers to the risk that a company's operations and financial performance may be negatively affected by
factors such as market competition, changes in consumer demand, or industry-specific issues.
- Business risks are caused by the uncertainty about the company’s sales and operating expenses.
- Ex. Investing in a startup company that operates in a highly competitive market with no clear product
differentiation, which increases the risk of market share loss and financial instability.
 Financial risk - is the possibility of losing money on an investment or business venture.
- relates to the company's financial structure, particularly the use of debt. It involves the risk that excessive
debt or poor financial management could impact the company's ability to meet its financial obligations.
- Ex: For example ay yung pagpurchase ng stocks ng isang company with a high debt-to-equity ratio,
meaning mas mataas ang value ng debts kesa sa equity ng company, which exposes the investor to the
risk of financial distress if yung company where the investor invested struggles to meet its debt
obligations.
 Liquidity risk - This is the inability to meet short-term obligations.
- Ito yung risk of not being able to buy or sell an investment quickly without significantly affecting its price
which can sometimes lead to difficulties in accessing cash when needed.
- Ex: For example, yung pag-invest sa isang real estate property wherein itong purchased ay limited lang
ang demand dahil kaunti lamang ang interesado dito which makes it challenging to sell the property
quickly kung kinakailangan.
 Default risk - also known as credit risk, pertains to the risk that a borrower or issuer of a financial instrument may fail
to make the required interest or principal payments. This is particularly relevant in bond investments because it is
related to the probability that some or all of the investments will not be returned.
- Ex: Buying corporate bonds from a company with a low credit rating, which increases the risk of the
company defaulting on interest payments or principal repayment.
 Interest rate risk – Money has time value and fluctuations in interest rates will cause the value of an investment to
fluctuate also.
- is the risk that changes in interest rates can impact the value of fixed-income investments. This is the risk
which gives rise to uncertainty about the cost of the debt.
- Ex: Holding long-term government bonds when interest rates rise, leading to a decrease in the bond's
market value due to the inverse relationship between interest rates and bond prices meaning when
interest rates are increased, the value of the existing bonds decreases.
 Management risk - relates to the competence and decision-making ng management team ng isang company.
- Poor management decisions can lead to negative impacts on the company's performance and,
subsequently, investment value.
- Ex: Investing in a mutual fund with a history of frequent changes in fund managers, potentially resulting in
inconsistent investment strategies and performance.
 Purchasing Power risk - also known as inflation risk, is the risk that the real value of your investments may be eroded
over time due to inflation and this result to the decrease of purchasing power of your returns or income.
- This risk is difficult to recognize than the other types of risk. Madaling ma-observe ang decline in the price
of a stock or bond, but it is often more difficult to recognize that the purchasing power of the return you
have earned on an investment has declined/risen as a result of inflation/deflation.
- Ex: Putting money into a savings account with an interest rate lower than the inflation rate, causing the
real value of the investment to decrease over time as it doesn't keep up with rising prices.

Understanding these various risks is crucial for making informed investment decisions and managing your
portfolio effectively. Different types of investments come with different risk profiles, and investors need to assess and
balance these risks to achieve their financial goals.
 Risks Associated With Manufacturing, Trading And Service Concerns
- Market Risk - the risk of gain or loss due to movement in the market value of an asset
1) Product Risk
a. Complexity – this risk is associated with complexity ng product development, manufacturing, or operations,
na nagreresulta sa inefficiencies, delays, and higher costs.
b. Obsolescence - The risk of products becoming outdated or irrelevant in the market, resulting in decreased
demand and potential losses
i. Ex: Pagma-manufacture ng DVD players when the market we have today now has shifted to
streaming.
c. Research and Development - The risk tied to investments in research and development, with uncertain
returns and potential failure of new product development
i. Ex: Example is yung pagi-invest ng malaki sa development sa mga bagong mga gamot na may
risk na maaring hindi siya maka-receive ng regulatory approval.
d. Packaging - The risk related to the packaging of products, including design, materials, and compliance,
which can impact consumer perception and legal compliance
i. Ex: Using non-compliant packaging materials for a food product which may lead to legal
consequences.
e. Delivery of Warranties - The risk that warranties or service commitments might not be fulfilled, leading to
potential legal and reputational issues.
i. Ex: Failing to provide timely warranty repairs for electronic devices, leading to customer
dissatisfaction.
2) Competitor Risk
a. Pricing Strategy - The risk associated with competitors' pricing strategies, which can impact the market
positioning and profitability of your products or services
i. Ex: For example ay yung pag-set mo ng mas mataas na price sa iyong product than your
competitors without offering added value.
b. Market Share - The risk of losing market share to competitors, affecting your company's revenue and
competitiveness
i. Ex: There is risk in losing market share when entering the smartphone industry due to aggressive
competition.
c. Market Strategy - The risk of ineffective market strategies that can result in poor market penetration or
customer acquisition.
i. Ex: Implementing an ineffective marketing campaign that doesn't resonate with the target
audience.
- Operations Risk
1) Process Stoppage - The risk of disruptions or stoppages in manufacturing or operations due to various factors, such
as equipment failures or supply chain issues.
 Ex: A manufacturing company stopping production due to a critical machine breakdown.
2) Health and Safety - The risk associated with workplace accidents, injuries, or health-related incidents, which can
result in legal liabilities and damage to reputation
 Ex: An employee suffering an injury due to inadequate safety measures and the company failed to address
it which might lead to legal action.
3) After Sales Service Failure - The risk that post-sales service and support may not meet customer expectations,
leading to dissatisfaction and potential losses.
 Ex: When providing poor customer service after a product sale, resulting in customer complaints
4) Environmental - The risk of non-compliance with environmental regulations, which can result in fines, legal actions,
and reputational damage.
 Ex: Improper waste disposal of a company which accidentally lead to pollution of nearby bodies of water
which may affect communities and can lead to legal action.
5) Technological Obsolescence - The risk that technology used in operations becomes outdated, impacting efficiency
and competitiveness.
 Ex: Using outdated software that causes delays and inefficiencies.
 6) Integrity
a. Management Fraud - The risk of fraudulent activities committed by management, which can result in
financial losses and legal consequences.
o Ex: Managers embezzling funds from the company for personal gain
b. Employee Fraud - The risk of fraudulent actions by employees, affecting financial stability and reputation.
o Ex: An employee manipulating financial records to hide theft
c. Illegal Acts - The risk of engaging in illegal activities, such as bribery or corruption, leading to legal issues
and reputational damage.
o Ex: Engaging in bribery to secure a contract, which when found can result in a legal investigation.
- Financial Risk - risk which has some direct financial impact on the company
1) Interest Rates Volatility - The risk of changes in interest rates affecting borrowing costs and financial stability.
 Ex: A company's loan interest rate increasing unexpectedly due to changes in the national interest rate.
2) Foreign Currency - The risk of adverse exchange rate fluctuations impacting financial results in international trade.
 Ex: A manufacturing company facing financial losses due to the devaluation of the currency in the country
where they source their materials
3) Liquidity - The risk of not having enough cash or liquid assets to meet short-term financial obligations.
 Ex: A small startup running out of cash to cover operating expenses and having to shut down
4) Derivative - The risk associated with using financial derivatives, which can lead to unexpected financial losses.
 Ex: An investment in complex financial derivatives leading to unexpected losses during a market downturn.
5) Viability - The risk of the overall financial success and sustainability of the business, including the ability to generate
profits and meet financial obligations.
 Ex: A struggling company's inability to generate profits for several consecutive years, raising concerns about
its long-term viability.
- Business Risk
1) Regulatory Change - The risk associated with changes in government regulations or laws that can impact a business's
operations, compliance requirements, and costs.
- Ex: A pharmaceutical company faces regulatory change risk when the government introduces stricter safety
testing requirements for new drug approvals, affecting their product development process.
2) Reputation - The risk of damage to a company's image, brand, or standing in the eyes of customers, stakeholders, and
the public, often resulting from negative events or actions.
- Ex: An e-commerce company's reputation risk increases when a data breach exposes customer information,
leading to negative headlines and a loss of trust among its customer base.
3) Political - The risk stemming from changes in political conditions, government policies, and geopolitical events that can
affect a company's operations, market access, or stability.
- Ex: An international car manufacturer faces political risk when tariffs are imposed on imported vehicles in a key
market due to a trade dispute between governments, affecting sales and profitability.
4) Regulatory and Legal - The risk of facing legal action, fines, or penalties due to non-compliance with regulations, laws,
or lawsuits, which can have financial and operational consequences.
- Ex: A financial institution faces regulatory and legal risk if it is accused of engaging in illegal lending practices,
resulting in investigations, fines, and lawsuits.
5) Shareholder Relations - The risk related to maintaining positive relationships with shareholders and addressing their
concerns, as strained relations can lead to shareholder activism, lawsuits, or stock price declines.
- Ex: A publicly traded company's shareholder relations risk may escalate if a prominent activist investor publicly
criticizes the company's management and calls for significant changes in its strategy.
6) Credit Rating - The risk that a company's credit rating may be downgraded, making it more expensive or challenging to
raise capital through debt issuance, which can affect financial stability.
- Ex: A corporation's credit rating risk increases if it struggles to meet its debt obligations and experiences a
downgrade from credit rating agencies, leading to higher borrowing costs.
7) Capital Availability - The risk associated with the availability and cost of capital, such as loans and equity financing,
which can impact a company's ability to fund growth and operations.
- Ex: A small startup faces capital availability risk if it is unable to secure additional funding from investors,
potentially hindering its growth plans and operations.
 8) Business Interruptions - The risk of unexpected events (e.g., natural disasters, cyberattacks, supply chain disruptions)
that disrupt a company's normal operations, potentially leading to financial losses and operational challenges.
- Ex: An online retailer experiences business interruption risk when a severe weather event disrupts its distribution
network, causing delays in product deliveries and impacting revenue.

 Risks Associated with Financial Institutions (ACTIVITY)

a. Financial – refers to the potential for losses or negative impacts on a bank or financial firm’s financial stability
and performance. This risk can include credit risk, market risk, liquidity risk, and operational risk, all of which can
affect the institution’s ability to meet its financial obligations
b. Non-Financial – risks that are not directly related to financial factors but can still impact the institution’s
operations and reputation. This includes risks like compliance risk, reputational risk, cybersecurity risk, and
strategic risk, which may result in legal issues, damage to the institution’s image, or operational disruptions
- This classification involves a whole lot of terminologies so in order for us to be familiarized with these, I
have here an activity. Pretty much self-explanatory and also, some terminologies were already mentioned
in the previous classifications, the only difference is that the following risk are associated with financial
institutions.

- Supply the following terminologies in the blank spaces on the table.

FINANCIAL NON-FINANCIAL
 Liquidity Risk  Operational Risk
 Market Risk o Systems
o Currency  Information Processing
o Equity  Technology
o Commodity o Customer Satisfaction
 Credit Risk o Human Resources
o Counterparty o Fraud and Illegal Acts
o Trading o Bankruptcy
o Commercial  Regulatory Risk
 Loans o Capital Adequacy
 Guarantees o Compliance
 Market Liquidity Risk o Taxation
o Currency Rates o Changing Laws and Policies
o Interest Rates  Environmental Risk
o Bond and Equity Prices o Politics
 Hedged Positions Risk o Natural Disasters
 Portfolio Exposure Risk o War
 Derivative Risk o Terrorism
 Accounting Information Risk  Integrity Risk
o Completeness o Reputation
o Accuracy  Leadership Risk
 Financial Reporting Risk o Turnover
o Adequacy o Succession
o Completeness

II. Liquidity Risk: The risk that a financial institution may not have enough liquid assets to meet its
short-term financial obligations.

III. Market Risk:

A. Currency Market Risk: The risk of losses due to fluctuations in exchange rates.
 B. Equity Market Risk: The risk associated with changes in stock prices.

C. Commodity Market Risk: The risk related to price changes in commodities such as oil, gold, or
agricultural products.

IV. Credit Risk:

A. Counterparty Credit Risk: The risk that a borrower or counterparty may default on their financial
obligations.

B. Trading Credit Risk: The risk associated with credit exposure in trading activities.

C. Commercial Credit Risk:

- Loans: The risk associated with borrowers not repaying loans.

- Guarantees: The risk related to the failure of parties to honor guarantees.

V. Market Liquidity Risk: The risk of not being able to buy or sell assets at a desired price due to
market conditions.

A. Currency Rates: Concerns changes in currency exchange rates.

B. Interest Rates: Involves changes in interest rates.

C. Bond and Equity Prices: Relates to fluctuations in bond and stock prices.

VI. Hedged Positions Risk: The risk that hedges or risk mitigation strategies may not fully protect
against losses.

VII. Portfolio Exposure Risk: The risk associated with the composition and diversification of an
investment portfolio.

VIII. Derivative Risk: The risk connected to the use of financial derivatives, such as options and futures,
which can result in unexpected financial consequences.

IX. Accounting Information Risk:

A. Completeness: The risk related to missing or incomplete financial data.

B. Accuracy: The risk of errors or inaccuracies in financial information.

X. Financial Reporting Risk:

A. Adequacy: Concerns the sufficiency of financial disclosures and information.

B. Completeness: Involves the risk of missing or incomplete financial reporting.

XI. Operational Risk:

 Systems:

o Information Processing: The risk associated with data processing systems.

o Technology: Relates to the potential problems with technology infrastructure.

  Customer Satisfaction: The risk of losing customers due to dissatisfaction.

 Human Resources: Relates to issues with staff, including turnover and competence.

 Fraud and Illegal Acts: The risk of internal or external fraudulent activities.

 Bankruptcy: The risk of the financial institution going bankrupt.

1) Regulatory Risk:

II. Capital Adequacy: Concerns regulatory requirements for maintaining sufficient capital.

III. Compliance: Involves risks related to not adhering to regulatory requirements.

IV. Taxation: Risks associated with changing tax laws and rates.

V. Changing Laws and Policies: Relates to risks due to shifts in laws and regulations.

 Environmental Risk:

 Politics: Concerns political decisions affecting the environment.

 Natural Disasters: Risks related to natural calamities like earthquakes or hurricanes.

 War: Risks associated with conflicts and war.

 Terrorism: The risk of terrorism-related events.

 Integrity Risk:

1) Reputation: The risk of damage to an institution's reputation due to unethical or dishonest

conduct.

9) Leadership Risk:

 Turnover: The risk related to key leadership personnel leaving the organization.

 Succession: Concerns the transition of leadership roles within the organization.

2) BUSINESS RISK she faces two uncertainties: (1) What price will be
a. refers to the uncertainty about the rate of return caused by received? (2) How long will it take to sell the asset? An
the nature of the business. example of an illiquid asset is a house in a market with an
The most frequently discussed causes of abundance of homes relative to the number of potential
business risk are uncertainty about the firm's sales and buyers. This investment may not sell for several months or
operating expenses. Clearly, the firm's sales are not even years. Of course, if the price is reduced sufficiently,
guaranteed and will fluctuate as the economy fluctuates or the real estate will sell, but the investor must make a
the nature of the industry changes. A firm's income is also selling price concession in order for the transaction to
related to its operating expenses. If all operating expenses occur.
are variable, then sales volatility will be passed directly to In contrast, a government Treasury bill can be
operating income. Most firms, however, have some fixed sold almost immediately with very little concession on
operating expenses (for example, depreciation, rent, selling price. Such an investment can be converted to
salaries). These fixed expenses cause the operating cash almost at will and for a price very close to the price
income to be more volatile than sales. Business risk is the investor expected.
related to sales volatility as well as to the operating The liquidity risk for ordinary equity shares is
leverage of the firm caused by fixed operating expenses. more complex. Because they are traded on organized and
active markets, ordinary equity shares can be sold quickly.
3) DEFAULT RISK Some ordinary equity shares, however, have greater
a. is related to the probability that some or all of the initial liquidity risk than others due to a thin market. A thin market
investment will not be returned. occurs when there are relatively few shares outstanding
The degree of default risk is closely related to the and investor trading interest is limited. The thin market
financial condition of the company issuing the security and results in a large price spread (the difference between the
the security's rank in claims on assets in the event of bid price buyers are willing to pay and the ask price sellers
default or bankruptcy. For example, if a bankruptcy occurs, are willing to accept). A large spread increases the cost of
creditors, including bondholders, have a claim on assets trading to the investor and thus represents liquidity risk.
prior to the claim of ordinary equity shareholders. Investors considering the purchase of illiquid investments -
ones that have no ready market or require price
4) FINANCIAL RISK concessions will demand a rate of return that
a. The firm's capital structure or sources of financing compensates for the liquidity risk.
determine financial risk. If the firm is all equity financed,
then any variability in operating income is passed directly 7) MANAGEMENT RISK
to net income on an equal percentage basis. If the firm is a. Decisions made by a firm's management and board of
partially financed by debt that requires fixed interest directors materially affect the risk faced by investors.
payments or by preferred share that requires fixed Areas affected by these decisions range from product
preferred dividend payments, then these fixed charges innovation and production methods (business risk) and
introduce financial leverage. This leverage causes net financing (financial risk) to acquisitions. For example,
income to vary more than operating income. The acquisition or acquisition-defense decisions made by the
introduction of financial leverage causes the firm's lenders management of such firms materially affected the risk of
and its stockholders to view their income streams as the holders of their companies' securities.
having additional uncertainty. As a result of financial
leverage, both investment groups would increase the risk 8) PURCHASING POWER RISK
premiums that they require for investing in the firm. a. Purchasing power risk is perhaps, more difficult to
recognize than the other types of risk. It is easy to observe
5) INTEREST RATE RISK the decline in the price of a stock or bond, but it is often
a. Because money has time value, fluctuations in interest more difficult to recognize that the purchasing power of the
rates will cause the value of an investment to fluctuate return you have earned on an investment has declined
also. Although interest rate risk is most commonly (risen) as a result of inflation (deflation). It is important to
associated with bond price movements, rising interest remember that an investor expects to be compensated for
rates cause bond prices to decline and declining interest forgoing consumption today. If an individual is invested in
rates cause bond prices to rise. Movements in interest peso-denominated assets such as bonds, Treasury bills,
rates affect almost all investment alternatives. For or savings accounts during the period of inflation, the real
example, as a change in interest rates will impact the or inflation adjusted rate of return will be less than the
discount rate used to estimate the present value of future nominal or stated rate of return. Thus, inflation erodes the
cash dividends from ordinary shares. This change in the purchasing power of the peso and increases investor risk.
discount rate will materially impact the analyst's estimate
of the value of a share of ordinary share.

6) LIQUIDITY RISK
a. Liquidity risk is associated with the uncertainty created by
the inability to sell the investment quickly for cash. An
investor assumes that the investment can be sold at the
expected price when future consumption is planned. As
the investor considers the sale of the investment, he or