Total risk

From CEOpedia | Management online

Total risk is an overall assessment that identifies, searches for all the risks associated with the implementation of a specific action. Total risk is a combination of systemic risk and non-systemic risk. This also applies to potential external and internal threats. The identification of these risks requires a complete risk assessment, which offers an all-encompassing picture of potential threats. The organisation should have to check all risk aspirations in order to make the best possible decision. From the perspective of unity, the overall risk is determined by the organisation's approach to aspects such as planning of activities, allocation of budget and expenditure, and regulatory correctness[1].

Investment risk

There are two key risks on the financial market, these are market and credit risk. Market risk results from constant changes in assets on the market. It mainly concerns financial undertakings. The main types of this term include:

  • interest rate ration - it results from continuous interest rate modifications and changes in the prices of financial instruments that are secondary to the level of these rates
  • exchange rate risk - results from uncontrolled changes in exchange rates,
  • share price risk - it is followed by changes in share prices and their financial instruments for which the share price is based,
  • the risk of commodity prices - the risk results from continuous changes in commodity prices that occurs on financial markets,
  • real estate price risk - it results from changes in the prices of property, possessions, plots and real estate in general.

Credit risk refers to the threat of insolvency of funds by an entity obliged to pay a debt. The risk of default is typical for the debt securities market [2].

Total risk control vs Total risk management

The management process and risk control itself are two different deadlines. The main task of financial managers is managing portfolios on the financial market. They are appropriately rewarded for taking and assessing the total risk. Persons responsible for the observation and control of the risk group will declare their portfolio in the financial market strive to minimize or completely exclude all possible loss-seeking situations. It is recommended to use different measurements of total risk to explain the embarrassing situation[3].

Examples of Total risk

  • Financial Risk: A company may have to undertake a project which involves a high cost that might not be covered by the expected returns from the project. This could lead to financial losses for the company.
  • Operational Risk: A company may be exposed to operational risks if their operations are not carried out efficiently. This could lead to delays in production, reduced customer satisfaction and ultimately a decrease in profits.
  • Environmental Risk: Companies may be exposed to environmental risks if their operations are not carried out in an environmentally friendly manner. This could lead to environmental degradation and the potential for fines or legal action.
  • Political Risk: Companies may be exposed to political risks if their operations are located in a country with a volatile political climate. This could lead to sudden changes in policy or laws which could negatively affect the company’s operations.
  • Reputational Risk: Companies may be exposed to reputational risks if their operations are perceived to be unethical or socially irresponsible. This could lead to a loss of trust from customers, investors and other stakeholders, which could affect the company’s profits and reputation.
  • Technological Risk: Companies may be exposed to technological risks if their operations rely heavily on new or emerging technologies. This could lead to technical glitches or failures, which could lead to losses or delays in production.

Advantages of Total risk

Total risk assessment can be extremely beneficial when attempting to identify and mitigate risks associated with a specific action. It offers the following advantages:

  • It allows for a comprehensive and holistic view of the risk landscape. This allows for a more thorough evaluation of all potential risks and allows for proactive risk management.
  • It provides a more accurate assessment of the overall risk than individual risk assessment. By looking at the entire risk picture, more accurate measures can be taken to manage the risk.
  • It allows for a better understanding of the interdependency of risks. By evaluating the relationship between multiple risks, more accurate assessments can be made.
  • It allows for the identification of concrete actions to reduce risk. By looking at the entire risk landscape, it is possible to identify specific actions that can be taken to reduce the risk.
  • It allows for a better understanding of the exposure of different stakeholders. This can be beneficial for determining the best course of action for mitigating the risks.

Limitations of Total risk

Total risk is an overall assessment that identifies and searches for all the risks associated with the implementation of a specific action. However, there are several limitations of total risk assessment:

  • Firstly, total risk assessment can be subjective and dependent on individual analysis of the risk factors. This can lead to discrepancies in assessing the risk and can be affected by the personal biases of the analyst.
  • Secondly, total risk assessment does not take into account the dynamic nature of risk factors. Risk factors may change over time and this can affect the overall risk assessment.
  • Thirdly, total risk assessment does not always reflect the actual level of risk posed by a particular action or event. It is often difficult to accurately predict the level of risk associated with a particular action or event.
  • Finally, total risk assessment can be expensive and time consuming, as it requires collecting and analyzing data and information from a variety of sources. This can be a challenge for organizations with limited resources.

Other approaches related to Total risk

Total risk is an overall assessment that identifies, searches for all the risks associated with the implementation of a specific action. Other approaches related to Total risk include:

  • Risk assessment: This is a systematic process of identifying, evaluating, and managing potential risks to achieve the desired outcome.
  • Risk management: This approach focuses on identifying, assessing, and controlling risks in order to prevent or minimize losses and maximize value.
  • Risk analysis: This approach involves analyzing the probability and severity of potential risks in order to determine the best course of action.
  • Risk mitigation: This approach focuses on minimizing the potential impacts of risks by reducing, avoiding, transferring, or accepting them.

In summary, Total risk is a comprehensive approach to identifying and managing risks associated with an action or project. Other approaches related to Total risk include risk assessment, risk management, risk analysis, and risk mitigation. Each of these approaches has its own set of strategies and techniques that can be used to identify, assess, and manage risks.

Footnotes

  1. Fung, Hung-Gay; Wen, Min-Ming; Zhang, Gaiyan, (2002), How does the use of credit default swaps affect firm risk and value? Evidence from US Life and Property/Casualty insurance companies.,Financial Management , p. 23
  2. J.H. Rawnsley, N. W. Leeson (1995), Total Risk: Nick Leeson and the Fall of Barings Bank, Hardcover, p. 1023
  3. A. Gray, Managing financial risk in agriculture during turbulent times., (2010) Agri Marketing, p. 580


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References

Author: Klaudia Rodak