Different Risk Factors - A risk 101

Contract Risk
Contract risks arise from the possibility that the legal contracts of the company will contain clauses obligating the business to terms and conditions that are unreasonably impacting the company in a negative manner. This risk type could have risk events such as performance penalties, contract termination penalties, warranty terms, non standard clauses not reviewed by legal department, unfavourable clauses inserted by counterparty without knowledge of the company etc.

Contract risk mitigation typically involves getting the Legal Department to be hands on the particular contract. As far as possible, standard clauses should be used for legal contract execution to minimise unknown or unwanted text.

Systemic Risk
Systematic risk refers to that portion of total variability in return caused by factors affecting the prices of all securities. Systemic risk is normally a cascading effect of market risk factors affecting the complete market. Economic, political, and sociological changes are sources of systematic risk

Examples of systemic risk is liquidity risk due to credit crunch or recession. The recent liquidity criris was a result of systemic risk wherein across the whole Banking system, credit lending was suspended.

Strategic Risk
Strategic Risk refers to risks affecting the overall strategic and objectives of a company. These are very high level risks and the negative impacts of startegic risks normally affects the survival of the organisation.

Business Risk
Business risks takes various forms and is prevalent in almost all business processes of a company. Every transaction conducted by a company involves risk of some nature. The objective of managing business risk is to identify these risks and then to mitigate them through the various risk responses.

Our services include Process Improvement, operational risk assessment and financial risk management.

Political Risk
Companies doing business internationally are faced with one new additional risk. Political Risk. In business language, political risk is the risk that an investment's returns could suffer as a result of political changes or instability in a country. Simply put, political risk referes to negative business impacts due to political situation in a country, whether in own country or in international country.

Political risk management is very crucial in today business environment. Business investments are very large and strategic in today’s situation. These investments and strategies cannot be put at the stake and mercy of political leaders. Outcomes of business decisions should only be a result of the economic and financial viability of the project.

In order to effectively manage political risk, the following links provide a great starting point to learn more about political risk and its management techniques.

http://strategy.sauder.ubc.ca/vertinsky/baim502/lecture08.ppt

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