Ch. 4: Op, Fin & Strat Risk Flashcards
(50 cards)
Six examples of strategies to mitigate people risk
Recruitment Selection Training and development Performance management Incentives Succession planning
Root cause (definition)
The event or circumstance that directly leads to an occurrence
Key risk indicator (KRI) (definition)
A financial or nonfinancial metric used to help define and measure potential losses
Exposure indicator (definition)
A metric used to identify risk inherent to an organization’s operations
Loss ratio (definition)
A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses
Control indicator (definition)
A metric used to identify an organization’s management of risk
Nine examples of risk indicators for people risk
Education Experience Staffing levels Employee surveys Customer service Compensation and experience benchmarked to industry Incentives such as bonuses Authority levels Management experience
Seven examples of risk indicators for process risk
Quality score cards Analysis of errors Areas of increased activity or volume Review of outcomes Internal and extra review Identification of areas of highest risk Quality of internal audit procedures
Six examples of risk indicators for systems risk
Benchmarks against industry standards Internal and external review Analysis to determine stress points and weaknesses Identification of areas of highest risk Testing Monitoring
The three major types of financial risk
Market risk
Credit risk
Price risk
Risk optimization (definition)
A state whereby risk and return are balanced so that a maximum return is achieved for the level of risk accepted by an organization
Hedging (definition)
A financial transaction in which one asset is held to offset the risk associated with another asset
Systematic risk (definition)
Risk that is common to all securities of the same general class and that therefore cannot be eliminated by diversification
The five major categories of market risk
Currency price risk Interest rate risk Commodity price risk Equity price risk Liquidity risk
Interest rate risk (definition)
The risk that a security’s future value will decline because of changes in interest rates
Swap (definition)
An agreement between two organizations to exchange payments based on changes in the value of an asset, yield, or index over a specific period
Cash matching (definition)
The process of matching an investment’s maturity rate with the amount of expected loss payments
Zero-coupon bond (definition)
A corporate bond that does not pay periodic interest income
Reinvestment risk (definition)
The risk that the rate at which periodic interest payments can be reinvested over the life of the investment will be unfavorable
Commodity price risk (definition)
The risk associated with the change in the prices of commodities that are necessary to an organization’s operations
Cash flow (definition)
Cash inflow minus cash outflow
Commodity futures contract (definition)
A contract either to make or to accept delivery of a specified quantity of a commodity on a given date
Equity price risk (definition)
The risk that changes in the price of a stock or another security will increase or decrease
Call option (definition)
An option to buy a set amount of the underlying security at any time within a specified.
