Module 3

Question 1

situations where there’s a possibility of loss

Answer 1

pure risk

Question 2

situations where there’s a chance for both loss and gain

Answer 2

speculative risk

Question 3

is the risk of losing money if the price of a commodity changes (for producers & users)

Answer 3

commodity price risk

Question 4

is the risk of loss caused by adverse interest rate movements

Answer 4

interest rate risk

Question 5

is the risk of loss of value caused by changes in the rate at which one nation’s currency may be converted to another nation’s currency

Answer 5

currency exchange rate risk

Question 6

Examples of Financial Risks
Individuals face financial risks in many aspects of their lives. These risks come in the form of:

Answer 6

Risk of unemployment or loss of income:
Risk of higher or unexpected expenses:
Risk related to assets/investments:
Risks related to debt or credit financing:

Question 7

this includes unemployment, underemployment, health issues, disability, and premature death.

Answer 7

Risk of unemployment or loss of income:

Question 8

this includes incurring higher expenses than budgeted or having to deal with unforeseen
emergency expenses.

Answer 8

Risk of higher or unexpected expenses:

Question 9

this includes potential declines in the value of assets/investments, as well as potential damage
and theft of assets.

Answer 9

Risk related to assets/investments:

Question 10

this includes being unable to service credit card debt, asset loans, mortgages, and so on.

Answer 10

Risks related to debt or credit financing:

Question 11

For corporations and financial institutions, there are additional types of risks faced, such as:

Answer 11

Market Risk
Credit Risk
Liquidity Risk
Operational Risk

Question 12

the risk that losses may occur to financial assets based on the dynamics of the overall financial markets, for example, an equity security losing a substantial portion of its value.

Answer 12

market risk

Question 13

the risk that a counterparty may default on their contractual obligations, for example, an individual defaulting on their
personal loan.

Answer 13

credit risk

Question 14

the risk that funding obligations may not be met due to cash constraints, for example, a bank not having enough cash
on hand to meet deposit withdrawal demand.

Answer 14

liquidity risk

Question 15

the risk that losses occur as a result of failed internal processes, people, and systems. For example, an employee making a mistake on a transaction that results in a monetary loss.

Answer 15

operational risk

Question 16

Managing financial risks: 8 methods to safeguard your finances

Answer 16

1. Invest wisely
2. develop effective cash flow management strategies
3. diversify your investment
4. increase your revenue streams
5. set aside funds for emergencies
6. reduce your overhead costs
7. get the right business insurance
8. get a trusted management accountant

Question 17

Risks associated with investments are one of the strongest and most palpable financial risks you can encounter. Luckily, there are many ways to learn the ropes to investing before giving it a final go. Make sure to gather enough information
before you make any investment decisions. In this regard, consulting with your accountant can be a great help, as they can give you sound advice on how you can maximize your returns.

Answer 17

invest wisely

Question 18

Understanding how you spend cash is just as important as knowing your risks. Cash flow management — or the practice of keeping your cash flow in optimal condition — is one of the best ways to secure a financially-stable future and safeguard your bottom line from dangers.

Answer 18

develop effective cash flow management strategies

Question 19

Diversification is indispensable in mitigating financial risks. By spreading out your investments among different financial instruments, you can minimize their potential risks while having a fallback in case things go awry for your
business.

Answer 19

diversify your investment

Question 20

When your business experiences a slowdown, having an alternative source of income can help you pay the bills. For instance, aside from your primary business, you can get low-risk investments or seek opportunities to get grants and subsidies from the government.

Answer 20

increase your revenue streams

Question 21

Consider saving some of your ROI in your savings account. While your savings account will
not yield significant long-term interest, it is still one of the safest ways to stash your money. Moreover, your savings account can also help you transfer cash electronically, paving the way for a quicker and more convenient financial transaction process.

Answer 21

set aside funds for emergencies

Question 22

Overspending on your overhead costs — or the costs associated with your daily operations but not related to profit generation — can also be damaging to your bottom line. By reducing your overhead costs, you can maintain
your daily operations sustainably while increasing your business savings.

Answer 22

reduce your overhead costs

Question 23

Insurance can act as your business’s safety net, but only when you don’t overspend on
premiums. However, you also don’t want to be underinsured. The key is to identify which type of insurance can provide the
protection you need against huge financial losses from accidents, lawsuits, natural resources or other unexpected incidents.

Answer 23

get the right business insurance

Question 24

There’s nobody who can help you with managing your cash flow and making savvy
business financial decisions better than your accountant. Talk to your trusted and reliable accountant to help you with different facets of your business finances, be it in paying off your debts or rounding up investment returns.

Answer 24

get a trusted management accountant

Question 25

is a risk treatment technique that combines coverage for pure and speculative risks in the same contract

Answer 25

an integrated risk management program

Question 26

is a provision that provides for payment only if two specified losses occur

Answer 26

a double-trigger option

Question 27

is responsible for the treatment of pure and speculative risks faced by the organization

Answer 27

chief risk officer

Question 28

is a comprehensive risk management program that addresses the organization’s pure, speculative, strategic, and operational risks

Answer 28

Enterprise Risk Management (ERM)

Question 29

refers to uncertainty regarding an organization’s goals and objectives

Answer 29

strategic risk

Question 30

are risks that develop out of business operations, such as product manufacturing

Answer 30

operational risk

Question 31

How to Implement Enterprise Risk Management Practices

Answer 31

Define risk philosophy Create action plans Be creative Maintain flexibility Continually monitor

Question 32

Before implementing any practices, a company must identify how it feels about risk and what its strategy around risk will be.

Answer 32

define risk philosophy

Question 33

With a company's risk philosophy in hand, it is time to create an action plan. This defines the steps a company must take to protect its assets and plans to protect the future of the organization after a risk

Answer 33

create action plans

Question 34

When considering risks, ERM entails thinking broadly about the problems a company may face. Though far-fetched, it is in a company's best interest to think of as many challenges it may face and how it will respond (or decide to not respond) to should the event happen.

Answer 34

be creative

Question 35

- As companies and risks evolve, a company must design ERM practices to be adaptable. The risks a company faces one day may be different the next; the company must be able to carry its current plan while still making plans for new, future risks.

Answer 35

maintain flexibility

Question 36

Once ERM practices are in place, a company must ensure the practices are adhered to. This means tracking progress towards goals, ensuring certain risks are being mitigated, and employees are performing tasks as expected.

Answer 36

continually monitor

Question 37

Decisions about whether to retain or transfer risks are influenced by conditions in the insurance marketplace

Answer 37

insurance market dynamics

Question 38

Three important factors that influencing the insurance market are:

Answer 38

The underlying cycle Consolidation in the insurance industry Securitization of risk

Question 39

refers to the cyclical pattern of underwriting stringency, premium levels, and profitability

Answer 39

The underwriting cycle

Question 40

refers to the combining of businesses through acquisitions or mergers

Answer 40

consolidation

Question 41

the boundaries between insurance companies and other financial institutions have been struck down

Answer 41

cross-industry consolidation

Question 42

means that insurable risk is transferred to the capital markets through creation of a financial instrument:

Answer 42

securitization of risk

Question 43

permits the issue to skip or defer scheduled payments if a catastrophic loss occurs

Answer 43

catastrophe bond

Question 44

is an option that derives value from specific insurance losses or from an index of values.

Answer 44

insurance option

Question 45

provides a payment if a specified weather contingency (e.g., high temperature) occurs

Answer 45

weather option

Question 46

The risk manager can predict losses using several different techniques:

Answer 46

1. Probability analysis 2. Regression Analysis 3. Forecasting base don loss distribution

Question 47

the risk manager can assign probabilities to individual and joint events – The probability of an event is equal to the number of events likely to occur (X) divided by the number of exposure units (N)

Answer 47

probability analysis

Question 48

events if the occurrence of one event does not affect the occurrence of the other event

Answer 48

independent events

Question 49

if the occurrence of one event affects the occurrence of the other

Answer 49

dependent events

Question 50

if the occurrence of one event precludes the occurrence of the second event

Answer 50

mutually exclusive

Question 51

characterizes the relationship between two or more variables and then uses this characterization to predict values of a variable

Answer 51

regression analysis

Question 52

is the sum of the present values of the future cash flows minus the cost of the project

Answer 52

net present value

Question 53

on a project is the average annual rate of return provided by investing in the project

Answer 53

internal rate of return

Question 54

is a computerized database that permits the risk manager to store and analyze risk management data – The database may include listing of properties, insurance policies, loss records, and status of legal claims – Data can be used to predict and attempt to control future loss levels

Answer 54

risk management information system

Question 55

Other Risk Management Tools

Answer 55

1. risk management information system 2.risk management intranets and web sites 3. risk map 4. value at risk (var) analysis 5. catastrophe modelling 6. Have a Plan for How To Manage Scope Change

Question 56

is a web site with search capabilities designed for a limited, internal audience

Answer 56

intranet

Question 57

is a grid detailing the potential frequency and severity of risks faced by the organization – Each risk must be analyzed before placing it on the map

Answer 57

risk map

Question 58

involves calculating the worst probable loss likely to occur in a given time period under regular market conditions at some level of confidence – The VAR is determined using historical data or running a computer simulation – Often applied to a portfolio of assets – Can be used to evaluate the solvency of insurers

Answer 58

value at risk (var) analysis

Question 59

is a computer-assisted method of estimating losses that could occur as a result of a catastrophic event – Model inputs include seismic data, historical losses, and values exposed to losses (e.g., building characteristics) – Models are used by insurers, brokers, and large companies with exposure to catastrophic loss

Answer 59

catastrophe modelling

Question 60

is exactly what it sounds like: a change to the scope of a project. Scope changes are deviations from what was originally agreed upon in terms of functionality, layout, quality, and responsibilities. These changes to a project’s scope could be the result of new requests and data or unclear requirements.

Answer 60

scope change

Question 61

is what happens when the project scope changes without conscious thought about the consequences. In other words, without going through a proper change control process.

Answer 61

scope creep

Question 62

How Scope Changes Impact Your Project

Answer 62

impact on time and cost impact on quality impact on the project risk

Question 63

The further into the project life cycle you are, the costlier scope changes get — whether that be financial-based or risk-based.

Answer 63

impact on time and cost

Question 64

Ideally, you should never compromise project quality — scope changes or not. But unfortunately, that’s not always the case when you have a drop-dead deadline.

Answer 64

impact on quality

Question 65

The more changes you make, and the later the changes are in the project lifecycle, the greater the risk of running into scope creep, delays, and complications.

Answer 65

impact on the project risk

Question 66

Tips for Managing Scope Change

Answer 66

1. Put the Project’s Success Top of Mind 2. Define the initial project scope 3. document proposed scope changes in your backlog 4. Understand the Impact in Scope, Schedule, and Budget 5. Communicate changes to the team 6. Have a Plan for How To Manage Scope Change 7. Learn from past scope changes

Question 67

Think of the project’s success (i.e., the goals and purpose of the project) as your North Star. It should always be what you look to when evaluating the validity of scope changes.

Answer 67

Put the Project’s Success Top of Mind

Question 68

The foundation for scope management is scope definition. To meet the goals of a project, you need to create a structured approach for defining, evaluating, and approving scope changes.

Answer 68

Define the initial project scope

Question 69

A great approach for defining all of the work required to complete a project is to visualize and evaluate the product backlog — from the request to the point of production.

Answer 69

document proposed scope changes in your backlog

Question 70

It’s always important to understand whether your progress is on track. To understand the impact of a proposed scope change, you can use a burndown chart that visualizes the ideal progress of stories vs. the actual progress. This allows you to judge what changing the scope of the project does to your timeline.

Answer 70

Understand the Impact in Scope, Schedule, and Budget

Question 71

Documenting and modeling scope change isn’t the end of the process — but this is where many teams run into issues. Communicating these changes to your team is a crucial step to prevent a lack of clarity and undefined objectives.

Answer 71

communicate changes to the team

Question 72

The biggest tip to remember is that in order to effectively manage change, you first need to have a plan in place. But how do you know if you have the right people assigned to the right tasks and that your plan will work? It starts with resource management.

Answer 72

Have a Plan for How To Manage Scope Change

Question 73

Everybody is different and offers unique perspectives and skills. This means the right scope change process will be unique to your organization and stakeholders. And the best way to design it is to learn through experience.

Answer 73

learn from past scope changes