ANWSER
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Question One:
a. Answer:
As a risk management consultant, I would advise Custodian Services Nigeria Limited to adopt the following strategies to mitigate risks and reduce losses:
1. Risk Identification: Conduct a thorough risk assessment to identify all potential risks, including operational, financial, and reputational risks.
2. Risk Analysis: Evaluate the likelihood and impact of each risk using qualitative and quantitative methods.
3. Risk Mitigation: Implement controls such as diversification, insurance, and improved internal processes to reduce exposure.
4. Training and Development: Provide training for employees and management to enhance their understanding of risk management principles.
5. Monitoring and Review: Establish a continuous monitoring system to detect and address risks proactively.
By adopting these measures, the organization can minimize losses and improve its resilience against future risks.
b. Answer:
The statement highlights the intrinsic relationship between risk and cost in business. For example:
– Financial Risk: A company taking a loan faces interest costs (financial risk). If the loan is not repaid, the cost includes penalties and reputational damage.
– Operational Risk: A manufacturing firm may face production delays (operational risk), leading to increased costs due to missed deadlines and contractual penalties.
– Market Risk: A business expanding into a new market faces uncertainty (market risk), with potential costs like failed investments or lost revenue.
These examples demonstrate that every risk carries an associated cost, regardless of its nature.
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Question Two:
a. Answer:
Rumsfeld (2008) and Diebold (2010) classify risks based on information availability:
– Rumsfeld’s Classification:
– Known Knowns: Risks we are aware of and understand (e.g., seasonal demand fluctuations).
– Known Unknowns: Risks we know exist but cannot predict (e.g., economic recessions).
– Unknown Unknowns: Risks we are unaware of (e.g., sudden pandemics like COVID-19).
– Diebold’s Classification:
Focuses on modeling risks using statistical and probabilistic methods, emphasizing measurable uncertainties (e.g., credit risk in banking).
Dichotomies:
– Rumsfeld’s approach is qualitative, while Diebold’s is quantitative.
– Rumsfeld addresses unpredictability, whereas Diebold focuses on modeling known uncertainties.
Practical Case:
A bank uses Diebold’s models to predict loan defaults (known unknowns) but may struggle with unknown unknowns like a global financial crisis (Rumsfeld’s framework).
b. Answer:
Parties with financial and non-financial commitments in a business include:
1. Shareholders: Provide capital and seek profits/dividends.
2. Employees: Contribute labor and expect salaries/job security.
3. Customers: Purchase products/services and expect quality/value.
4. Suppliers: Provide materials and expect timely payments.
5. Government: Ensures compliance with laws and collects taxes.
6. Community: Expects ethical practices and social responsibility.
Each party has distinct interests that influence the business’s operations and risk landscape.
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Question Three:
a. Answer:
Businesses operate in dynamic environments influenced by internal and external forces, exposing them to various risks:
– Economic Risks: Inflation, exchange rate fluctuations.
– Technological Risks: Cybersecurity threats, obsolescence.
– Political Risks: Regulatory changes, instability.
– Environmental Risks: Natural disasters, climate change.
– Competitive Risks: Market rivalry, innovation pressures.
For example, a tech company faces rapid technological changes (dynamic environment) and must manage risks like innovation lag or data breaches (hiccups). Effective risk management involves adapting to these forces to ensure sustainability.
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