FACULTY OF BUSINESS SCIENCE

DEPARTMENT OF RISK MANAGEMENT AND INSURANCE

MODULE CODE: RMI436

MODULE TITLE: FINANCIAL RISK MANAGEMENT
GROUP ASSIGNMENT 1
LEVEL: 4.1
YEAR: 2023

NAME SURNAME REG NUMBER MODE OF ENTRY

Rukudzo J Mutema R205605R Conventional
Lorraine Jameson R206983T Conventional
Wadzanai Gijimani R204336J Conventional
Emmanuel Nyoni R1918126N Convectional
Petronella Vurayayi R183738E Conventional
Candy Makova R209919M Conventional

CITING RELEVANT PRACTCAL EXAMPLES OF EACH TYPE, EXPLAIN THE

FOLLOWING CLASSES OF RISKS; FINANCIAL RISK, COMPLIANCE RISK,
STRATEGIC RISK, AND OPERATIONAL RISK. (40 MARKS)
FINANCIAL RISK

Financial risk is known as the possibility of suffering a financial loss or having a detrimental
effect on an organisational’s financial situation. It has to do with uncertainties in the financial
markets, like shifts in credit ratings, interest rates, currency rates, and commodity prices. Here
are few real-world instances;

Interest rate risk

If interest rates rise, a business with variable rate loan may be exposed to financial risk. This
could lead to greater interest payments and possibly have an impact on profitability of the
company.

Credit risk

When borrowers miss loan payments, financial organisations are exposed to credit risk. The risk
has the potential to cause losses in money and harm the institution’s capital sufficiency.

Currency Risk

Unfavorable fluctuations in exchange rates expose an import-export company to financial risk.

For example, a company’s expenses may rise if it imports items with a foreign exchange rate
depreciation.

Market risk

This refers to the risk of losses arising from changes in market conditions, such as fluctuations in
interest rates, exchange rates or stock prices. For instance, a multinational company faces market
risk when it operates in different countries and is exposed to currency exchange rate fluctuations.

Liquidity risk

This is the risk of not being able to meet short term financial obligations or fund operations due
to a lack of liquid assets. For example, a company may face liquidity risk if it does not have
enough cash or easily marketable securities to cover its immediate financial needs.
COMPLIANCE RISK

Refers to the potential for an organization to violate laws, regulations or internal policies and
procedures. It arises from the failure to comply with legal and regulatory requirements, industry
standards or ethical guidelines. Examples include the following

Regulatory compliance risk

This is the risk of noncompliance with laws and regulations imposed by government authorities.
For example, a financial institution may face regulatory compliance risk if it fails to adhere to
anti-money laundering regulations resulting in penalties, reputation damage and potential legal
action.

Data privacy breach and security risk

This refers to the risk of non- compliance with data protection laws and regulations, leading to
the unauthorized access, use, or disclosure of sensitive information. For example, a company
may face compliance risk if it fails to implement adequate security measures to protect customer
data, resulting in data breaches and potential legal consequences.

Environmental compliance risk

This is the risk of non-compliance with environmental laws and regulations. For example, a
manufacturing company may face compliance risk if it fails to properly dispose hazardous waste,
leading to environmental damage, fines and legal liabilities.

Employment compliance risk

This refers to the risk of non-compliance with employment laws and regulations. For instance, a
company may face compliance risk if it violates labor laws related to minimum wages, working
hours, or working safety, resulting in legal disputes, penalties and damage to reputation.

Ethical compliance risk

This is the risk of non-compliance with ethical standards and guidelines. For example, a
pharmaceutical company may face compliance risk if it engages in unethical marketing practices
such as promoting off-label use of drugs, leading to regulatory scrutiny, fines and damage to its
reputation.
 Occupational Health and Safety Violations

In the event that an accident or injury occurs, a manufacturing business that disregards
workplace safety standards may be subject to legal actions, financial fines, and damage to its
reputation.

STRATEGIC RISKS

This type of risk entails uncertainty and possible harm to an organisation’s capacity to meet its
strategic goals. It has to do with how decisions are made and how competition exists. Here are
some examples;

Market disruption risk

If a business in a quickly changing industry can’t keep up with technology developments or

shifts in consumer preferences, it could lose market share and exposed to strategic risk.

Technological obsolescence risk

This refers to the risk of being left behind by technological advancements or failing to adopt new
technologies that can enhance competitiveness. For example, companies that failed to embrace
digital transformation and leverage technologies like cloud computing, artificial intelligence, or
data analytics faced strategic risks of losing market relevance and being outperformed by more
technologically savvy competitors.

New Competitor Entry

If a new competitor with a disruptive business model enters the market, an established company
may be exposed to strategic risk. This could have impact on the profitability and market position
of the established company.

Reputation risk

This is the risk of damage to the organization’s reputation due to negative public perception,
stakeholder dissatisfaction or ethical lapses. For example, a company that faces a major product
recall, a data breach, or a scandal involving senior executives can experience significant strategic
risks including customer trust, investor confidence and market value.
 Geopolitical and global risk

This is the risk of disruptions caused by geopolitical events, global economic trends or changes
in trade policies. For example, companies with global operations face strategic risks related to
political instability, trade wars, currency fluctuations or changes in regulations that can impact
the supply chains, market access or profitability.

Mergers and Acquisitions

When undertaking mergers or acquisitions, organisations face strategic risks such as integration
issues, cultural differences, and overpaying for the target company, which can affect the overall
success of the transaction.

OPERATIONAL RISK

According to Collier, P.M. and Agyei-Ampomah, S. (2006), Operational risk refers to the
potential for loss or disruption arising from inadequate or failed internal processes, people,
systems or external events. It encompasses a wide range of risks that can impact an
organization’s day-to-day activities and its ability to deliver products or services.

IT System Failure

An organisation that depends significantly on its computer systems may be exposed to

operational risk in the event of a system failure, which could cause data loss, customer service
delays, or business disruptions.

Supply Chain Disruptions

When a company depends mostly on a single supplier, there is an operational risk if the supplier
has problems with manufacturing or doesn’t supply materials on time, which results in delays or
stoppages in production.

Employee Error

An operational risk arises when a worker commits a mistake that results in monetary loss, like a
data entry error in accounting records or an improper trade execution in a financial institution.
 Fraud and theft

Operational risk can arise from fraudulent activities or theft by employees or external parties. For
example, a retail store may face operational risk if employees engage in theft or if customers use
counterfeit payments methods resulting in financial losses. and reputational damage.

Natural disasters and external events

Operational risks can be triggered by external events beyond the organizations control such as
natural disasters, political unrest or pandemics. For example, a hotel chain may face operational
risk if a hurricane damages its properties leading to business interruption and financial losses.

To sum up, in order for organisations to effectively manage risks, they must recognize and
evaluate the many kinds of hazards. Business can reduce possible losses and safeguard their
reputation by comprehending and controlling risks related to finances, compliance, strategy, and
operations. Strong risk management techniques can aid companies in navigating unpredictable
regulatory and economic conditions, which will eventually improve their long-term viability and
profitability.
REFERENCES

Collier, P.M. and Agyei-Ampomah, S. (2006), Management accounting: risk and control strategy.
CIMA Official Study System. Oxford: Elsevier.