RISK AND ITS MANAGEMENT INTRO
ACTUARIAL SCIENCE QUESTIONS AND
VERIFIED ANSWERS|100%
CORRECT|GRADE A+
Risk - ANSWER used to describe a situation where there is uncertainty about what outcome will occur
can describe the expected losses associated with a situation
can describe the variability around the expected value
Two Meanings of Risk - ANSWER One situation is riskier than another if it has greater:
1. Expected Loss
2. Uncertainty (variability around the expected loss)
Indirect Losses - ANSWER arise as a consequence of direct losses
extremely important for businesses, one of the main reasons that businesses try to reduce risk
Types of Indirect Losses - ANSWER 1. Loss of normal profit (net cash flow)
2. Extra operating expenses
3. Higher cost of funds and foregone investment
4. Bankruptcy costs (legal fees)
Indirect losses that can arise from the risks faced by businesses: - ANSWER 1. damage to productive
assets can produce and indirect loss by reducing or eliminating the normal profit (net cash flow) that the
asset would have generated if the damage had not occurred
, 2. large direct losses can also lead to indirect losses if they threaten the viability of the business and
thereby reduce the willingness of customers and suppliers to deal with the business or change terms
(prices) at which they transact
3. if sales or production are reduced in response to direct losses, certain types of normal operating
expenses (continuing expenses) may not decline in proportion to the reduction in revenues, thus
increasing indirect losses
4. if a long interruption in production would cause many customers to switch suppliers, or if a firm has
binding contractual commitments to supply products, it may also be desirable for the firm to increase
operating costs above normal levels following direct losses. The increased operating cost would create
an indirect loss- FIX PG 3
5. The possibility that the business will face a higher cost of obtaining funds from lenders or from new
equity issues following large direct loss.
business risk management - ANSWER concered with possible reductions in business value from any
source
business value to shareholders - ANSWER is relfected in the value of the firm's common stock and
depends fundamentally on the expected size, timing and risk (variability) associated with the firm's
future net cash flows (cash inflows less cash outflows
major business risks that give rise to variation in cash flows and business value - ANSWER price risk,
credit risk and pure risk
Major types of business risk - ANSWER Price Risk- (Output price Risk and Input Price Risk)
1. Commodity Price Risk
2. Exchange Rate Risk
3. Interest Rate Risk
Credit Risk
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