1. Module Name: FIN304 FINANCIAL RISK MANAGEMENT Mr. Gagan Mongar Lecturer RTC Faculty Mob: 17549057 Business Department Year: 2018

2. Unit 1-Introduction to Risks Definition of Risk Classification of Risks Price Risk Credit Risk Pure Risk System Risk The burden of risk on society Methods of Handling Risk Risk and return trade off Implications of various other risks for firms

3. Meaning of Risks The term risk has variety of meanings in business and every day life. At its most general level, risk is used to describe any situations where there in uncertainty about what outcomes will occur. In Financial and investment Management risk is often used in a more specific sense to indicate possible variability in outcomes around some expected value.

4. Types of Risk facing Businesses Business Risk Management is concerned with possible reduction in business value from any source. Unexpected reduction in cash inflows or increases in cash outflows can significantly reduce business value. Major business risks are 1. Price Risk 2. Credit Risk 3. Pure Risk

5. 1.Price Risk Refers to uncertainty over the magnitude of cash flows due to possible changes in output and input prices. Output price risks refers to the risks of changes in the prices that a firm can demand for its goods and services. Input price risks refers to the risks of changes in the prices that a firm must pay for labor, materials, and other inputs to its production process.

6. 3 specific types of price risks are a)Commodity Risk- fluctuation in the prices of commodity such as coal, copper,oil,gas,electricity etc. b)Exchange rate, also called currency risk, is the risk that changes in the relative value of certain currencies will reduce the value of investments denominated in a foreign currency. c)Interest rate risk-Interest rate risk is the possibility that the value of an investment will decline as the result of an unexpected change in interest rates. This risk is most commonly associated with an investment in a fixed-rate bond. When interest rates rise, the market value of the bond declines, since the rate being paid on the bond is now lower in relation to the current market rate. Also affects firms cost of borrowing funds to finance its operations.

7. 2.Credit Risk The risk that a firms customers and the parties to which it was lent money will delay or fail to make promised payments is known as Credit risk. Most form face credit risk for accounts receivables. Although it is impossible to know exactly who will default on obligations, properly assessing and managing credit risk can lessen the severity of loss. Interest payments from the borrower or issuer of a debt obligation are a lender's or investor's reward for assuming credit risk.

8. 3.Pure Risk A category of risk in which loss is the only possible outcome; there is no beneficial result. Pure risk is related to events that are beyond the risk-taker's control and, therefore, a person cannot consciously take on pure risk The three major type of pure risk that’s Business include 1.The risk of reduction in value of business assets due to physical damage, theft, and expropriations (seizure of assets by foreign governments). 2.The risk of legal liability for damages or harm to customers, suppliers and other parties 3.The risk associated with paying benefits to injured workers under workers compensation laws and the risk of legal liability for injuries or other harms to employees that are not governed by workers compensation laws.The risk of illness, death and disability to employees and some time the family members for which business have agreed to make payments under employee benefits plan, including obligation to employees under pension and other retirement saving plans.

9. 4.Systems Risks 9 It comprises of technology changes and product innovations Technology impacts the operations of the firm, and hence, technology failure would implicate business functions drastically. Systems risk refers to fluctuations in returns resulting from the failure of computer or business systems.