This is a powerpoint presentation on the topic " Types of Risks."

1. PRESENTED TO: PRESENTED BY:
DR. SHVETA SINGH MOHIT
180101030009
Types of RiskTypes of Risk
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2. CONTENTS
 Meaning of Risk
 Risk vs. Uncertainty
 Different types of Risk
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3. MEANING OF RISK
 Risk traditionally has been defines in terms of uncertainty.
 Risk is defined as uncertainty concerning the occurrence of
a loss.
 Although Risk is an ambiguous term, that’s why Risk
Managers use the term “Loss Exposure” to identify the loss.
 A Loss Exposure is any situation or circumstance in which a
loss is possible, regardless of whether a loss actually
occurs.
A loss exposure is any possibility of financial loss due
to loss of use, damage or financial claim against you or
your small business
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4. EXAMPLES OF RISK
 Manufacturing plants that may be damaged by an
earthquake or flood.
 Defective products that may result in lawsuits against the
manufacturer
 Possible theft of a company property because of inadequate
security
 Potential injury to employees because of unsafe working
conditions.
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5. RISK VS. UNCERTAINTY
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Basis Risk Uncertainty
1. Meaning Probability of winning or losing
something worthy is known as
Risk
It implies a situation
where the future events
are not known
2. Ascertainment It can be measured It can’t be measured
3. Outcome Chances of outcome are
known
Chances of outcome
are not known
4. Minimization It can be minimized It can’t be minimized
5. Probability Can be assigned Can be assigned

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Types
of
Risk
Credit
Risk
Interest
Rate
Risk
Market
Risk
Asset
Liability
Gap
Risk
Interest
Rate
Risk
Market
Risk
Currenc
y Risk
Due-
Diligenc
e Risk
Systemati
c
Risk and
Unsystem
atic Risk

7. CREDIT RISK
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Credit Risk is the possibility of loss resulting from a
borrower’s failure to repay a loan or meet contractual
obligation.
Although it is not possible to know exactly who will default
on obligation, properly assessing and managing credit risk
can lessen the severity of loss.
To access credit risk on a consumer loan, Lenders look at
the 5 Cs: credit history, capacity to repay, capital, loan’s
conditions, associated collateral.

8. ASSET LIABILITY GAP RISK
 It is a financial risk that arise due to mismatch between the
assets and liabilities as part of an investment strategy in
financial accounting.
 A company can face a mismatch between assets and
liabilities because of illiquidity or changes in interest rates;
asset/liability management reduces the likelihood of a
mismatch
(i) Liquidity is an institution’s ability to meet it’s liability by
converting current assets into cash.
(ii) Interest rate risk exposure to adverse movement in the interest
rate.
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9. CONTINUE….
EXAMPLE:
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(i) A bank earns on Average rate if 6% on loan and pays
4% on deposit.
(ii) So, NIM is 6% - 4% = 2%.
(iii) Since bank are subject to interest rate risk.
(iv) Because on clients’ demand higher interest rates on
their deposit to keep assets at the bank.

10. INTEREST RATE RISK
 The interest rate risk refers to the chance that investments
in bonds will suffer as a result of unexpected interest rate
changes.
 Interest rate risk is the probability of a decline in the value of
an asset resulting from unexpected fluctuating in Interest
rates. It is mostly associated with fixed income securities
rather than equity investment.
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12. MARKET RISK
 Market Risk is the possibility of an investor experiencing
losses due to factors that affect the overall performance of
the financial market in which he or she is involved.
 It is also called ‘systematic risk’ can’t be eliminated through
diversification.
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13. CURRENCY RISK
 Currency Risk is the potential risk of loss from fluctuating
foreign exchange rates when an investor has exposure to
foreign currency or in foreign currency traded investment.
Also called ‘Exchange Rate Risk’.
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14. CONTINUE….
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Example:
XYZ co. ( a Indian company) issues bond for Rs. 1000 @
5% p.a. i.e. Rs. 50.
Rate of exchange --- $1 = Rs 1
Assume after 1 year, rate of exchange becomes----
$0.85 = Rs 1
Now the bond of 5% coupon payment which is still Rs. 50
is worth only $42.5 (Rs. 50/1 * 0.85)
Despite the issuer ability to pay, the investor has lost a
portion of his return because of the fluctuation of the
exchange rate.

15. DUE DILIGENCE RISK
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Taking precautions before doing any activity . It is
investigation or exercise of care that a reasonable business
or a person is expecting to take before entering into an
agreement with another party.
Due diligence common practice in the U.S. with the
passage of “Securities Act 1933”. Securities deals and
broker material information relating to the instruments they
are selling

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19. CONCLUSION
 Modern businesses face a diverse collection of obstacles,
competitors, and potential dangers. Risk control is a plan-
based business strategy that aims to identify, assess, and
prepare for any dangers, hazards, and other potentials for
disaster—both physical and figurative—that may interfere
with an organization's operations and objectives. The core
concepts of risk control include: Avoidance, Loss
Prevention, Loss Reduction, Separation, Duplication,
diversification.
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20. REFERENCES
 Rejda, G.E.& McNamara, J.M., Principle of
Risk Management & Insurance, Parson
 https://www.investopedia.com/terms/r/risk-
control.asp
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