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Unsystematic risk
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- 2. Types of Risk The meaning of systematic and unsystematic risk in finance: Systematic risk is uncontrollable by an organization and macro in nature. Unsystematic risk is controllable by an organization and micro in nature.
- 3. Types of Riskin Finance
- 4. Unsystematic Risk Unsystematicrisk is due to the influence of internal factors prevailing within an organization. Such factors are normally controllable from an organization's point of view. It is a micro in nature as it affects only a particular organization. It can be planned, so that necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk.
- 5. Types of UnsystematicRisk The types of unsystematic risk are • Business or liquidity risk, • Financial or credit risk and • Operational risk.
- 6. Business Risk or LiquidityRisk BUSINESS RISK IS ALSO KNOWN AS LIQUIDITY RISK. IT IS SO, SINCE IT EMANATES (ORIGINATES) FROM THE SALE AND PURCHASE OF SECURITIES AFFECTED BY BUSINESS CYCLES, TECHNOLOGICAL CHANGES, ETC.
- 7. Types of Business/LiquidityRisk The types of business or liquidity risk are depicted and listed below. Asset liquidity risk and Funding liquidity risk.
- 8. 1. Asset liquidityRisk The meaning of asset liquidity risk is as follows: Asset liquidity risk is due to losses arising from an inability to sell or pledge assets at, or near, their carrying value when needed. For e.g. assets sold at a lesser value than their book value.
- 9. 2. Funding LiquidityRisk The meaning of funding liquidity risk is as follows: Funding liquidity risk exists for not having an access to the sufficient-funds to make a payment on time. For e.g. when commitments made to customers are not fulfilled as discussed in the SLA (service level agreements).
- 10. Financial or credit risk FINANCIALRISK IS ALSO KNOWN AS CREDIT RISK. IT ARISES DUE TO CHANGE IN THE CAPITAL STRUCTURE OF THE ORGANIZATION. THE CAPITAL STRUCTURE MAINLY COMPRISES OF THREE WAYS BY WHICH FUNDS ARE SOURCED FOR THE PROJECTS. THESE ARE AS FOLLOWS: OWNED FUNDS. FOR E.G. SHARE CAPITAL. BORROWED FUNDS. FOR E.G. LOAN FUNDS. RETAINED EARNINGS. FOR E.G. RESERVE AND SURPLUS.
- 11. Types of Financialor Credit Risk The types of financial or credit risk are depicted and listed below. Exchange rate risk, Recovery rate risk, Credit event risk, Non-Directional risk, Sovereign risk and Settlement risk.
- 12. 1. EXCHANGE RISKRATE The meaning of Exchange risk rate is as follows: Exchange rate risk is also called as exposure rate risk. It is a form of financial risk that arises from a potential change seen in the exchange rate of one country's currency in relation to another country's currency and vice-versa. For e.g. investors or businesses face it either when they have assets or operations across national borders, or if they have loans or borrowings in a foreign currency.
- 13. 2. Recovery RateRisk The meaning of Recovery Rate Risk is as follows: Recovery rate risk is an often neglected aspect of a credit-risk analysis. The recovery rate is normally needed to be evaluated. For e.g. the expected recovery rate of the funds tendered (given) as a loan to the customers by banks, non-banking financial companies (NBFC), etc.
- 14. 3. Sovereign Risk Themeaning of Sovereign Risk is as follows: Sovereign risk is associated with the government. Here, a government is unable to meet its loan obligations, reneging (to break a promise) on loans it guarantees, etc.
- 15. 4. Settlement Risk Themeaning of Settlement Risk is as follows: Settlement risk exists when counterparty does not deliver a security or its value in cash as per the agreement of trade or business.
- 16. Operational risk OPERATIONAL RISKSARE THE BUSINESS PROCESS RISKS FAILING DUE TO HUMAN ERRORS. THIS RISK WILL CHANGE FROM INDUSTRY TO INDUSTRY. IT OCCURS DUE TO BREAKDOWNS IN THE INTERNAL PROCEDURES, PEOPLE, POLICIES AND SYSTEMS.
- 17. Types of OperationalRisk The types of operational risk are depicted and listed below. • Model risk, • People risk, • Legal risk and • Political risk.
- 18. 1. Model risk Themeaning of model risk is as follows: Model risk is involved in using various models to value financial securities. It is due to probability of loss resulting from the weaknesses in the financial-model used in assessing and managing a risk.
- 19. 2. People Risk Themeaning of People Risk is as follows: People risk arises when people do not follow the organization’s procedures, practices and/or rules. That is, they deviate from their expected behavior.
- 20. 3. Legal Risk Themeaning of Legal Risk is as follows: Legal risk arises when parties are not lawfully competent to enter an agreement among themselves. Furthermore, this relates to the regulatory-risk, where a transaction could conflict with a government policy or particular legislation (law) might be amended in the future with retrospective effect.
- 21. 4. Political Risk Themeaning of Political Risk is as follows: Political risk occurs due to changes in government policies. Such changes may have an unfavorable impact on an investor. It is especially prevalent in the third-world countries.
- 22. Conclusion Every organizationmust properly group the types of risk under two main broad categories viz., Systematic risk and Unsystematic risk. Systematic risk is uncontrollable, and the organization has to suffer from the same. However, an organization can reduce its impact, to a certain extent, by properly planning the risk attached to the project. Unsystematic risk is controllable, and the organization shall try to mitigate the adverse consequences of the same by proper and prompt planning. So these are some basic types of risk seen in the domain of finance.