A risk management process that enables managers to

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A risk management process that enables managers to distinguish between the risks that are most likely to provide opportunities and the risks that are most likely to be harmful helps companies generate superior returns. The Risk Management Process
Part I : Risk and Risk Management ProcessStep 4 : Selecting a Risk Response Risk response strategies can be classified into four “T” categories:Tolerate. This strategy involves accepting the risk and its effect. In some cases, the risk is well understood and taking it provides opportunities to create value. In other cases, the risk must be taken because other risk response strategies are unavailable or too costly.Treat. This strategy involves taking action to reduce the risk and its effect.Transfer. This strategy involves moving the risk and its effect to a third party.Terminate.This strategy involves avoiding the risk and its effect by ceasing an activity.The Risk Management Process
Part I : Risk and Risk Management ProcessStep 4 : Selecting a Risk Response Consider The following Example : Assume that a bank has expertise in making loans to small companies in its home country. A nearby country is opening its economy and experiencing strong growth. The bank is looking for value-enhancing opportunities and decides to use its business expertise to make loans to small companies in the country. At this stage, the bank is willing to toleratethe risks of doing business in a foreign country because the opportunity is potentially significant.The Risk Management Process
Part I : Risk and Risk Management ProcessStep 4 : Selecting a Risk Response A few years later, the bank has a large portfolio of loans in the country, but the economic situation there is deteriorating. The bank is concerned about the risk of an increasing number of borrowers defaulting on their loans; this risk is called credit risk. Thus, the bank decides to treatthis credit risk by implementing stricter criteria before granting loans to small companies and by obtaining additional collateral to back each loan. The Risk Management Process
Part I : Risk and Risk Management ProcessStep 4 : Selecting a Risk Response The economic situation in the country continues to deteriorate and the bank decides to transfersome of the credit risk to another financial institution that is willing to purchase part of the bank’s portfolio of loans.A few months later, the country faces a recession, which leads to social and political unrest. The bank makes the decision that it no longer wants to do business there. It sells its remaining portfolio of loans to another financial institution and ceases all activities in the country. In doing so, the bank terminatesall risks.The Risk Management Process
57The Risk Management ProcessStep Five : Control And Monitor
Part I : Risk and Risk Management ProcessStep 5 : Control and MonitorLike many processes, Risk Management should be iterativeand subject to regular evaluations.

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