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Sources of Risk - Essay - Risk Management

Sources of risk

There are many sources of risk that an organization must take into account before a decision is made. Risk may be specific at corporate level such as political, legal and financial risk. At the strategic business level economic, natural and market risks may be assessed. Project risks may be a specific to a project such as technical, health and safety operational and quality risks.

  1. Political risk: Political risk is a type of risk faced by investors, corporations, and governments. Political risk faced by firms can be defined as “the risk of a strategic, financial, or personnel loss for a firm because of such non market factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection). This risk is due to change in government policy, public opinion, change in ideology, legislation etc.
  2. Environmental risks: Management of environmental risk is a part of corporates Life. Identifying environmental hazards and controlling associated risks is important, not only protect the environment but also prevent the corporates from incurring large fines, remediation costs, loss of reputation etc. Environmental risks can be caused by the release of pollutants to the air, land or water. Here the uncertainty is due to contaminated land, or pollution liability, noise, public opinion, internal or external corporate policy, environmental regulations etc.
  3. Planning risk: It arises when permission is required, socio economic impact etc.
  4. Market risk: Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. This risk arises due to competition, demand, obsolesce, customer satisfaction etc.
  5. Economic risk: It arises due to taxation; cost inflation changes in interest rates, exchange rates etc. Economic risk is a nebulous term with a variety of definitions. In a nutshell, economic risk is the risk that an endeavor will be economically unsustainable, for a variety of reasons ranging from a change in economic trends to fraudulent activities which ruin the outcome of the project. Before starting projects, economic risk has to be considered to determine whether or not the potential risks are outweighed by the benefits.
  6. Natural risk: Uncertainty due to unforeseen ground conditions, weather, earth quake etc.
  7. Project risk: This risk is occurring due to uncertainty in performance requirement, standard, leader ship, organization, planning and quality control, labour and resources, communication and culture.
  8. Technical risk: Technical Risk is simply the risk associated directly with the knowledge base being employed and its technical aspects including such things as understanding, reproducibility and the like. Exposure to loss arising from activities such as design and engineering, manufacturing, technological processes and test procedures. It arises due to uncertainty due to design adequacy, operation ability and reliability.
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