Weekly outline
General
Dear fellow students, welcome to the virtual class of Risk Management course.
Risk management is a structured approach/methodology in managing uncertainty related to threats; a series of human activities including risk identification, risk measurement and assessment, development of strategies to manage them and risk mitigation using resource empowerment/management. Through this course, students are expected to be able to understand the principles of risk management of a company in terms of planning, management, and supervision. An understanding of this concept gives students the ability to identify, analyze, and estimate unwanted results that can cause company losses. Thus, it will be able to create an optimal measurement tool for the company's success and appropriate risk management. This is what will be studied in this course.
Welcome to the course, hopefully it can be useful for all of us.
Kind regards,
R.A. Fiska Huzaimah, S.E., M.Si
Nindytia Puspitasari Dalimunthe, S.E., M.Sc.
Dosen Pengampu 1:
Name
R.A. Fiska Huzaimah, S.E., M.Si
Gender
Female
NIP/NIK/other Identity
197902282005012001
NIDN
0028027905
Telephone number
0817100760
E-mail
kekeirabee@gmail.com
Office Address
Fakultas Ekonomi dan Bisnis
Universitas Lampung
Jl. Sumantri Brojonegoro 1, Gedung Meneng, Bandar Lampung
Dosen Pengampu 2:
Name
Nindytia Puspitasari Dalimunthe, S.E., M.Si
Gender
Female
NIP/NIK/other Identity
199005242019032013
NIDN
Telephone number
081369282816
E-mail
nindytia.puspitasari@feb.unila.ac.id
Office Address
Fakultas Ekonomi dan Bisnis
Universitas Lampung
Jl. Sumantri Brojonegoro 1, Gedung Meneng, Bandar Lampung
After taking the Risk Management course, students are expected to be able to:
- Identify the risks associated with the company.
- Calculate the possibility of risk occurrence and the amount of loss incurred if a risk occurs.
- Determine the appropriate risk management strategy.
- Carry out risk management planning, management, and supervision properly.
- Analyze and optimize company value.
In order for students to be able to access and be able to attend this lecture properly and smoothly, there are several things that all students need to follow, namely:
- Students can access this course on the LMS Vclass Unila (vclass.unila.ac.id) via a smartphone or computer/laptop that is connected to the internet.
- To be able to access (login) on the Unila Vclass LMS, students are required to have a Unila SSO account which can be obtained from the Unila ICT UPT.
- Students can ask for a password from the course lecturer so that they can enter as a participant.
- Students are required to use Real Name and include NPM as Vclass account name. Example of an account naming format: Listumbinang Halengkara_20200928. In addition, students are also required to display official original photos on their respective account profiles.
- After joining the virtual class for this course, students are required to read all instructions and material/content that has been given by the lecturer for each meeting, before the lecture meeting is held.
- Students are required to actively participate in discussions held at each meeting, because this is one aspect of the final assessment.
- Students are required to do all the assignments given by the lecturer and collect them in the allotted time.
- Students are allowed to actively ask questions in every learning activity if there are things that are still not understood from the material presented by the lecturer.
- Students are required to take quizzes which will be held two (2) times, namely at the end of the 4th and 12th meeting/week.
- Students are required to take the Mid-Semester Examination (UTS) which will be held at the 8th meeting/week.
- Students are required to take the Final Semester Examination (UAS) which will be held at the end of the lecture or meeting / 16th week.
- Semester Study Plan File 535.8KB PDF document
Attached is the Risk Management RPS, containing the material to be delivered during one semester, supporting lecturers, assessment weights, and reference books. Please read it as a lecture guide for each session.
1. Introduction, Risk Management Principles / Fiska Huzaimah
- ISO 31000 describes the principles of risk management, namely: (1) Risk management creates and protects value; (2) Risk management is an integral part of organizational processes; (3) Risk management is part of decision making; (4) Risk management explicitly assesses uncertainty; (5) Risk management is systematic, structured, and timely; (6) Risk management based on the availability of the best information; (7) Risk management is adjusted to conditions; (8) Risk management considers cultural factors and human resources; (9) Risk management is transparent and inclusive; (10) Risk management is dynamic, iterative, and responsive to change; (11) Risk management facilitates continuous improvement and strengthens the organization. This is the basic principle in corporate risk management.
After attending Meeting 1 on Risk Management Principles, students are expected to be able to:
- Explain the meaning of risk, types of risk, and sources of risk.
- Explain the importance of risk management in an organization or company.
- Understand the principles of risk management.
- PPT Meeting 1 File 957.7KB Powerpoint 2007 presentation
2. Risk Management Process / Fiska Huzaimah
Based on ISO 31000:2009, the risk management process is an important part of risk management because it is the application of the principles and framework of risk management that has been built. The risk management process consists of three main processes, namely context setting, risk assessment, and risk management.
Determining the context of risk management aims to identify and disclose organizational goals, the environment in which the objectives are to be achieved, interested stakeholders, and the diversity of risk criteria. They will help to reveal and assess the nature and complexity of the risk.
The second process is risk assessment, which includes the risk identification stage, which aims to identify risks that may affect the achievement of organizational goals. Based on the identified risks, a risk list can be compiled for later risk measurement to see the level of risk.
The risk measurement process is in the form of risk analysis which aims to analyze the possibility and impact of the identified risks. The measurement results are in the form of risk status which shows the size of the level of risk and a risk map which is a description of the distribution of risk in a map. Another stage in risk assessment is risk evaluation which is intended to compare the results of risk analysis with predetermined risk criteria to be used as the basis for implementing risk management.
After attending Meeting 2 on Risk Management Processes, students are expected to be able to:
- Understand the risk management process within the company.
- Understand the context of enterprise risk determination.
- Identify risks in order to determine the level of risk.
- Process of Risk Management File 466.8KB PDF document
3. Risk Measurement Instruments and Techniques / Fiska Huzaimah
Risk measurement is an attempt to find out the size of the risk that will occur. This is done to see the level of risk faced by the company, then can see the impact of the risk on the company's performance as well as being able to prioritize risks, which risks are the most relevant. Risk measurement is an advanced stage after risk identification. Where risk identification is basically a systematic and continuous analysis activity to find/identify the possibility of potential losses facing/threatening the company. This is done to determine the relative importance of risks, to obtain information that will help to determine the appropriate combination of risk management tools to deal with them.
- Meeting 3 Course Material File 2.2MB Powerpoint 2007 presentation
Students will have to make a review or summary of the presentation about Risk Measurement Instruments and Techniques.
It should be written or typed no longer than 1 page, 1 space.
4. Quiz 1 / Fiska Huzaimah
In Meeting 4, Quiz 1. This quiz will be held to evaluate students' understanding of the topics of Risk Management Process especially Risk Identification and Risk Measurement. Understanding of the material is expected to be seen from how students answer quizzes correctly and comprehensively.
There are 2 article about Risk Management.
- Explain the process of risk identification that is conducted by the research; what, how, result of the risk identification.
- Explain what method is used to measure risk that has been identified in the article, and define the result of the risk measurement.
Answers can be handwritten on paper and then photographed or can be typed in a doc or pdf file.
Students have 24 hours to complete the quiz, and it must be submitted no later than Friday, September 17, 2021, at 23:59.
Good luck.
5. Pure Risk Management and Insurance / Fiska Huzaimah
There are no measurable benefits when it comes to pure risk. Instead, there are two possibilities. On the one hand, there is a chance that nothing will happen or no loss at all. On the other, there may be the likelihood of total loss.
Pure risks can be divided into three different categories: personal, property, and liability. There are four ways to mitigate pure risk: reduction, avoidance, acceptance, and transference. The most common method of dealing with pure risk is to transfer it to an insurance company by purchasing an insurance policy. Many instances of pure risk are insurable. Pure risks can be insured because insurers are able to predict what their losses may be.
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known - relatively small - loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insurer will compensate the insured. The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy is called the premium.
How do insurers make the distinction when deciding which risks they are willing to assume and which they would rather avoid? There are some key characteristics that define an insurable risk:
Not Catastrophic. Losses need to be deemed “reasonable” by the insurer. A catastrophic risk for an insurance company is any type of loss that is so pervasive, expensive, or unpredictable that it would not be reasonable to offer coverage for it. Those larger risks can still be insurable, but by insurers who believe that they can appropriately quantify its potential for loss and charge appropriate premiums to do so. Catastrophe perils may include such natural disasters as earthquakes, hurricanes, and acts of war.
Predictability. If an insurer cannot predict expected losses, then they cannot properly quantify potential losses. Insurers, their actuaries, really, prefer a predictable loss in order to be able to determine premiums. If a loss rate is not predictable, it’s less likely to be in that insurer’s “appetite,” meaning they won’t want to take on that type of risk. How, then, do insurers come up with a predictable loss rate? Back to their actuaries, professionals that mathematically, statistically, and financially analyze financial risk by running a plethora of statistical models and analysis. Some of those calculations ultimately boil down to the “law of large numbers,” which is the use of an extensive database used to forecast anticipated losses. Others are far more complex in their modeling. Simply stated, insurers need to be able to estimate how often particular losses might occur and what the expected severity of these losses could be. Naturally, losses that occur more frequently and tend to be more severe will drive higher premiums.
"Chance" and Random Losses. Loss must be the result of an unintentional act or one that occurred by chance in order to be insurable. In essence, it must be beyond the control or influence of the business. Losses also need to be random, meaning that the potential for adverse selection does not exist. Adverse selection describes situations in which buyers and sellers have access to different information and market participation is affected as a result of this so-called state of asymmetric information.
Defined and measurable. Losses need to be definite and measurable. The effective and expiration dates on a policy “define” the duration that is then “measured” as to the amount of premium dollars needed to offset projected losses.- Risk and Insurance File 217KB PDF document
- Insurance - An Introduction File 279.9KB PDF document
Students will have to make a review or summary of the presentation about Pure Risk Management and Insurance.
It should be written or typed 1-2 pages long, 1 space.
6. Price Risk Management Strategies / Fiska Huzaimah
Price risk is the risk that the value of a security or investment or asset will decrease. Price risk hinges on a number of factors, including earnings volatility, poor management, industry risk, and price changes. A poor business model that isn't sustainable, a misrepresentation of financial statements, inherent risks in the cycle of an industry, or reputation risk due to low confidence in business management are all areas that will affect the value of a security. Certain commodity industries, such as the oil, gold, and silver markets, have higher volatility and higher price risk as well. The raw materials of these industries are susceptible to price fluctuations due to a variety of global factors, such as politics and war. Commodities also see a lot of price risk as they trade on the futures market that offers high levels of leverage. Unlike other types of risk, price risk can be reduced. Diversification is the most common and effective tool to mitigate price risk. Financial tools, such as options, futures, and short selling, can also be used to hedge price risk.
- Commodity Price Risk File 5.6MB PDF document
Students will have to make a review or summary of the presentation about Price Risk Management Strategies.
It should be written or typed 1-2 pages long, 1 space.
7. Operational and Legal Risks / Fiska Huzaimah
Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or events that disrupt business operations. Employee errors, criminal activity such as fraud, and physical events are among the factors that can trigger operational risk. There are seven categories of operational risk laid out in Basel II:
- Internal fraud. Misappropriation of assets, tax evasion, intentional mismarking of positions and bribery.
- External fraud. Theft of information, hacking damage, third-party theft and forgery.
- Employment practices and workplace safety. Discrimination, workers' compensation, employee health and safety.
- Clients, products and business practice. Market manipulation, antitrust, improper trade, product defects, fiduciary breaches and account churning.
- Damage to physical assets. Natural disasters, terrorism and vandalism.
- Business disruption and systems failures. Utility disruptions, software failures and hardware failures.
- Execution, delivery and process management. Data entry errors, accounting errors, failed mandatory reporting and negligent loss of client assets.
Some organizations have a formal operational risk management function, while others don't. Those that have them tend to be at different stages of maturity. However, these are the steps companies follow:
- Define operational risk management, its scope, purpose and function. Keep in mind that operational risk definitions vary from industry to industry.
- Define roles that will be necessary for the function to succeed, which may involve -- but does not necessarily require -- a chief operational risk officer.
- Define operational risk management's relationship to other risk management functions cooperatively with those other functions.
- Decide the ways in which operational risk will be monitored and measured.
- Decide which tools will be necessary to enable a successful operational risk function, and determine whether those tools already exist in the organization or if additional tools are required. Procure what's necessary with the help of IT and security to avoid introducing unnecessary risk into the tech stack or unknowingly creating security gaps.
- Identify the necessary data sources and their owners; secure access to the data needed for operational risk management.
- Work with other risk functions and the business to identify process-related risks and their respective causes.
- Identify risks related to processes, such as whether they can scale as necessary or whether the processes are adequate within the context in which they run.
- Define risk categories.
- Map processes in detail, along with their risks and controls.
- Define key risk indicators.
- Ensure that each part of the organization involved in a process has been identified.
- Understand what resources are required for a process. Monitor for changes, such as the need to scale up or down.
- Understand the company's risk appetite in detail.
- Implement control measures.
- Educate the workforce about operational risks and what's expected of them as individuals. Include contact information so employees know whom to contact about a potential issue.
- Assess the impact of the operational risk management function on the business, and to the degree it involves change, ensure sound change management practices.
- Continuously measure and monitor operational risks. Use the historical data to understand trends, weak spots, etc.
Some types of legal risk that a business can face includes regulatory risks, compliance risks, contractual risks, non-contractual risks, dispute risks, and reputational risks.- Operational Risk File 341.8KB PDF document
- Legal Risk Management File 5MB PDF document
Students will have to make a review or summary of the presentation about Operational and Legal Risk.
It should be written or typed 1-2 pages long, 1 space.
8. Mid-Semester Exam / Fiska Huzaimah
In Meeting 8, Mid Semester Exam. This exam will be held to evaluate students' understanding of the concept and materials from Meeting 5 till 7. Understanding of the material is expected to be seen from how students answer the exam correctly and comprehensively.
Subject : Risk Management
Semester : Odd 2021/2022
Study Program : S1 Management
Class : International
Date : October 14, 2021
Lecturer : R.A. Fiska Huzaimah, S.E., M.Si
Time : 3 daysExam Terms and Mechanisms:
- The exam will start at 07.30 by joining the Zoom Meeting with the ID that has been assigned.
- The questions are in the form of analytical essay.
- Exam questions will be distributed during the zoom meeting.
- Exam time is given for 3 days from the time it is distributed.
- Examinees are required to take the exam individually. Similar answers will be subject to a point deduction.
- Exam answers is to be submitted on this forum.
9. Speculative Risk Management and Price Risk / Nindytia Dalimunthe
Assalamualaikum wr.rb.
Good morning guys.. Welcome to Risk Management Class
Today's class will be delivered through Vclass. Please read and watch the material I attached below.
Zoom Meeting will be used for next week class with the topic liquidity risk.
Thank You
- Pricing Risk File 2.9MB Powerpoint presentation
Expected return and return = The expected return is the profit or loss that an investor anticipates on an investment that has known historical rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these results.
Expected Return=WA×RA+WB×RB+WC×RC
where:
WA = Weight of security
ARA = Expected return of security
AWB = Weight of security
BRB = Expected return of security
BWC = Weight of security
CRC = Expected return of security C
For example, if an investment has a 50% chance of gaining 20% and a 50% chance of losing 10%, the expected return would be 5% = (50% x 20% + 50% x -10% = 5%)Variance Realized versus expected return
Empirical distribution of returns
the risk return tradeoff = The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor will accept a higher possibility of losses.
Systematic versus Idiosyncratic risk and Diversification
The CAPM in practice = The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.
The formula for calculating the expected return of an asset given its risk is as follows:
- Speculative Risk File 828KB Powerpoint presentation
Speculative risk is a category of risk that, when undertaken, results in an uncertain degree of gain or loss. In particular, speculative risk is the possibility that an investment will not appreciate in value. Speculative risks are made as conscious choices and are not just a result of uncontrollable circumstances. Since there is the chance of a large gain despite the high level of risk, speculative risk is not a pure risk, which entails the possibility of only a loss and no potential for gains.
Examples of Speculative Risk
Most financial investments, such as the purchase of stock, involve speculative risk. It is possible for the share value to go up, resulting in a gain, or go down, resulting in a loss. While data may allow certain assumptions to be made regarding the likelihood of a particular outcome, the outcome is not guaranteed.
Sports betting also qualifies as having speculative risk. If a person is betting on which team will win a football game, the outcome could result in a gain or loss, depending on which team wins. While the outcome cannot be known ahead of time, it is known that a gain or loss are both possible.
If you buy a call option, you know in advance that your maximum downside risk is the loss of the premium paid if the option contract expires worthless. At the same time, you do not know what your potential upside gain will be since nobody can know the future.
On the other hand, selling or writing a call option carries unlimited risk in exchange for the premium collected. However, some of that speculative risk can be hedged with other strategies, such as owning shares of the stock or by purchasing a call option with a higher strike price. In the end, the amount of speculative risk will depend on whether the option is bought or sold and whether it is hedged or not.
Almost all investment activities involve some degree of speculative risk, as an investor has no idea whether an investment will be a blazing success or an utter failure. Some assets—such as an options contract—carry a combination of risks, including speculative risk, that can be hedged or limited.
10. Liquidity Risk / Nindytia Dalimunthe
- Intriduction File 656.1KB PDF document
Unlike risks that threaten the very solvency of an FI, liquidity risk is a normal aspect of the everyday management of an FI. For example, DIs must manage liquidity so they can pay out cash as deposit holders request withdrawals of their funds. Only in extreme cases do liquidity risk problems develop into solvency risk problems, where an FI cannot generate sufficient cash to pay creditors as promised. This chapter identifies the causes of liquidity risk on the liability side of an FI's balance sheet as well as on the asset side. We discuss methods used to measure an FI's liquidity risk exposure and consequences of extreme liquidity risk (such as deposit or liability drains and runs) and examine regulatory mechanisms put in place to ease liquidity problems and prevent runs on FIs. Moreover, some FIs are more exposed to liquidity risk than others.
11. Investment Risk / Nindytia Dalimunthe
- Investment Risk File 587.2KB PDF document
In recent years, institutional investors have placed a much sharper focus on the total risk of their portfolio. This has led to the widespread use of risk budgeting. The process starts with a broad portfolio allocation into asset classes that reflects the best trade-off between risk and return. Once a total risk budget is decided upon, this can be allocated to various asset classes and managers. Thus, risk budgeting reflects a top-down view of the total portfolio risk. At the end of the investment process, it is important to assess whether realized returns were in line with the risks assumed. The purpose of performance evaluation methods is to decompose the investment performance into various components. The goal is to identify whether the active manager really adds value. Part of the returns generally represents general market factors, also called “beta bets”; the remainder represents true value added, or “alpha bets.” The purpose of this chapter is to present risk and performance evaluation tools used in the investment management industry
deadline 18/11/2021 at 10.00
12. Quiz 2 / Nindytia Dalimunthe
Deadline today 11.30
13. Market Risk / Nindytia Dalimunthe
Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in thefinancial market. Market risk and spesific risk (unsystematic) make up the two major categories of investment risk. Market risk, also called "systematic risk," cannot be eliminated through diversification, though it can be hedged in other ways. Sources of market risk include recssions, political turmoil, changes in interest rates, natural disasters, and terrorist attacks. Systematic, or market risk, tends to influence the entire market at the same time.
This can be contrasted with unsystematic risk, which is unique to a specific company or industry. Also known as “nonsystematic risk,” "specific risk," "diversifiable risk" or "residual risk," in the context of an investment portfolio, unsystematic risk can be reduced through diversification.
- Market Risk Material File 781.5KB PDF document
- PPT File 68.5KB Powerpoint presentation
This PPT shows how to calculate market risk by using VAR method
14. Pension Fund Risk Management and Country Risk / Nindytia Dalimunthe
- PPT File 214KB Powerpoint presentation
For some years now, traditional pension plans, also known as pension funds, have been gradually disappearing from the private sector. Today, public sector employees, such as government workers, are the largest group with active and growing pension funds. This article explains how the remaining traditional pension plans work.
How Pension Funds Work
The most common type of traditional pension is a defined-benefit plan. After employees retire, they receive monthly benefits from the plan, based on a percentage of their average salary over their last few years of employment. The formula also takes into account how many years they worked for that company. Employers, and sometimes employees, contribute to fund those benefits.
As an example, a pension plan might pay 1% for each year of the person's service times their average salary for the final five years of employment. So, an employee with 35 years of service at that company and an average final-years salary of $50,000 would receive $17,500 a year.
Private pension plans offered by corporations or other employers seldom have a cost-of-living escalator to adjust for inflation, so the benefits they pay can decline in spending power over the years.
- Pension FUnd File 7.2MB Video file (MP4)
15. Investment Portfolio / Nindytia Dalimunthe
- PPT File 135KB Powerpoint presentation
Portfolio management is the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution. Portfolio management consists of three main elements: investing time horizon, diversification of investments, and risk tolerance.
Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and threats across the full spectrum of investments. The choices involve trade-offs, from debt versus equity to domestic versus international and growth versus safety.
16. Final Semester Exam / Nindytia Dalimunthe
1. What are the two reasons liquidity risk arises? How does liquidity risk arising from the liability side of the balance sheet differ from liquidity risk arising from the asset side of the balance sheet? What is meant by fire-sale prices?
2. a. What is meant by marketrisk?
b. Why is the measurement of market risk important to the manager of a financial institution?
3. What is the primary function of an insurance company? How does this function compare with the primary function of a depository institution?
4. What is the adverse selection problem? How does adverse selection affect the profitable management of an insurance company?
5. What are the similarities and differences among the four basic lines of life insurance products?
Hand written, time 90 mins
