Are you a Risk Expert? by Rohit Jaryal, Harpinder Kaur, Joel Mathew, Andrea Vu Truang (the best ebook reader for android TXT) 📕

Risk management allows us to avoid surprises in business. If we have proper risk management practices in place, then we can avoid any issues by talking to relevant people and finding solution in time.

Good risk management practices improves communication between the project team and stakeholders. Discussions are always based on current information. If we have corrected current information and data, it’s very easy to communicate our ideas and involve internal and external stakeholders in emerging risks. This enhances and excels the team as it makes good work relationships

Risk management practices include schedule planning and cost planning at the start of projects. Thus, avoiding any budget fluctuations or shortages during the running time of project as everything is being accounted for already.

Good risk management processes lead an organization towards success. When everything that could go wrong in a project is known already, there are expectations of success. It brings positive vibe in the project team and improvement in production and morale too.

Good risk management allows the team to focus on critical areas of the project. that includes areas that need proper attention so that nothing goes wrong but also the areas which will bring maximum profits to the organization. By doing this we can use our resources efficiently by eliminating the delays and guesswork in a project.

Risk management processes improves the operational efficiencies which keeps the customers happy. Happier customer is what evolves the business through referrals. This guarantees the growth of business.

When it comes to business side good risk management practices avoid issues by making sure you are always in compliance with the regulations and implementation of proper security procedures are being carried throughout.

Proper risk management practices helps in making successful business strategies by saving cost and time.

When a company is proactive and has a risk management plan, it sends a positive message that they are open for business. Staff of company feels self-assured and confident as they are working for a resourceful and professional company. It shows company has high standards and cares for workers and of their wellbeing.

Risk perceptions in financial sectors can be seen in "Hedge funds"

A group of people, who decide to invest toward a common financial goal, create an investment pool.  A hedge fund is basically an investment pool. However, due to the requirements of the high risk-tolerance to expect high returns, hedge funds are only open to qualified investors. High-net-worth individuals (HNWIs), limited liability companies, or the managers in the field are some examples considered to meet with the requirements.

Firstly, a hedge fund is operated by a hedge fund manager. His compensation is defined based on his performance or specifically, the returns he makes. Therefore, the hedge fund managers are more inclined to invest aggressively and willing to take higher risks. The gaining returns are determined by how correctly the hedge funds managers predict the market sensitivity. The hedge fund managers use different financial derivatives which are usually sophisticated to make decisions.

Secondly, the hedge funds, typically run by the private institutions, are not mornitored by any legalatory bodies. Although it allows flexibility, the lack of oversight add more risks.

Thirdly, the hedge funds are not a liquid investment. The investors can not convert them into cash or redeem them at their favour.

While fears of COVID-19 battered the stock market, hedge funds outperformed. Bill Ackman, the founder and CEO of Pershing Square Capital Management, made $2.6 billion out of the hedge fund bet of $27 million. According to Narayanan, A. (2020), Ackman “believes the burrito chain will, like Zoom Video Conference (ZM), gain in the long term from the coronavirus crisis, as people turn to delivery apps amid lockdowns.”.

And he is not the only investor who made the fortune during the pandemic.

Three major banking risks are as follows

There are certain credit risks that revolve across financial institutions. Banks usually issue loans to their most trusted customers. However, there are certain risks that the issuer (the bank) is hereby taking. One of the most common credit risks is the risk of default on a debt that may arise if the borrower is failing to make the payments. The timing of recession or economic slowdown makes it difficult for certain segments of businesses to pay back their owed credits to the banks and hence in those circumstances create enormous pressure on the economy. Banks mitigate this risk by updating their Know Your Client (KYC) rule annually or sometimes even semi-annually. This is a way they assure that they know what events their clients are going through and whether they process any insolvency risk.

Operational risk is one of the most important risk that the banks have certain setups to avoid. Banks are regulated by certain regulatory bodies and have to maintain their operational efficiency to its best. Operational risk can cost the bank and its customers a significant amount. For example, a single piece of important document not delivered to its customer on time can cause legal consequences towards the bank. The banks will have audit teams setup for all of departments and businesses to assure that its complying with the set standards by the regulatory bodies.

Market risk is the risk that comes with the fluctuations in the economy. There are certain measures taken by the bank to avoid market risk. However, it is unpredictable under certain circumstances. For example, an outbreak like covid-19 can cause to economic slowdown and lead to variations in the plans initially setup by the senior management. Even though, it is not practical to predict all kinds of market risk. The banks will usually have a specialized team monitoring the fluctuations in the economy simultaneously and will adjust according to it.

Figure 2: Market Risk