The importance of risk management

 Abstract:
• Risk plays a crucial role in the realization of any project. The aim of this research is to understand the importance and evaluation of general risks.

• An experiment has been conducted, presented in Figure 1, showing 4 different scenarios of events and how an event in the foreign exchange market may result in a 40% risk of loss for each position.

1.Introduction:
• This paper addresses the topic of Risk Management.
• From the beginning, we will familiarize ourselves with the term Risk, and throughout the paper, we will touch upon points regarding Risk Management and whether we can use Risk to our advantage.

2. Research Objective:
• The importance of Risk Management
• Exposure to Risk
• Risk Management Process
• Benefits of Risk Management
• Risk Management Plan

3. Research Methodology:
• To achieve the research objective, I based this work on a review of academic literature and scientific papers on risk management and the effects achieved through quality corporate and NVM management.

3.1. Research Questions:
The importance of risk management.
The impact of risk on our lives.
The relationship between probability and risk.

3.2. Research Hypotheses:
As a summary of the questions, we take the example of financial investments, and from this experiment, we understand that there is a random distribution between gains and losses for each specified group of variables determining a strategy (higher probability of profit).

4. Literature Review:
• Risk is a perceived event today that may occur in the future with a probability “worn” by humans and has a evaluated or measured impact on an unspecified objective. Orfea Dhuci. (2011), Basic Knowledge of Risk and Its Management, OMBRA GVG
• Risk management is the process of identifying, assessing, and controlling threats to the capital and profits of an organization.
• A risk management program should be integrated with organizational strategy. To connect them, risk management executives must first define the organization’s risk appetite — that is, the amount of risk it is willing to accept to achieve its objectives.
• Mike Chapple, Senior IT Director at the University of Notre Dame, expressed in his article on “RISK APPETITE VS. RISK TOLERANCE”: “The big task is to determine which risks fit within the organization’s risk appetite and which require additional controls and actions before they are acceptable. Some risks will be accepted without any further necessary action. Others will be mitigated, transferred to another party, or avoided altogether.”

5. Importance of Risk Management:
• Risks faced by modern organizations have become more complex, driven by the rapid pace of globalization.
• A recent external risk that appeared as a supply chain issue in many companies — the coronavirus pandemic — quickly turned into an existential threat, affecting the health and safety of their employees, business operations, the ability to collaborate with customers, and the corporate reputation.
• Ron Shinkman, a professional journalist, stated: “The pandemic is an excellent example of a risk issue that is very easy to ignore if you don’t take a strategic holistic (overall) view and a long-term view of the types of risks that can harm you as a company,” and after the pandemic, he said: “Many companies will look back and say: ‘You know, we should have known about this, or at least thought about the financial implications of something like this before it happened.’”

6. Exposure to Risk:
What is exposure to risk?
• Exposure to risk is the possible loss in quantity from ongoing or planned business activities.
How it is calculated:
• The level of exposure to risk is calculated by multiplying the probability of a risk incident by its potential loss. Exposure to risk = risk impact x probability.
Why exposure to risk is important:
• Exposure to business risk is used to rank the probability of different types of losses and to determine which losses are acceptable or unacceptable.
What are the most common types of exposure to risk?
• Brand damage, compliance failures, security breaches, and liability issues.

Graph 1: The graph shows 4 different scenarios of how the event may unfold.
• Example:
 We open 100 investment positions, with a 1% risk of total capital, where the probability of winning is 60%, and the Risk and Return are 1:1 (meaning we put at risk $100 to win $100).

7. Risk Management Process According to ISO:
ISO 31000 standard, Risk Management — Guidelines
• 1. Identify risks
• 2. Analyze the likelihood and impact of each
• 3. Prioritize risks based on business objectives
• 4. Treat (or respond to) risk conditions
• 5. Monitor results and adjust as needed
IOS — The International Organization for Standardization

8. Benefits of Risk Management:
• Effective risk management that may have a negative or positive impact on capital and income brings many benefits.
• Benefits of risk management include:
1. Increased awareness of risk throughout the organization;
2. More confidence in organizational objectives and goals because risk is factored into the strategy;
3. Better and more efficient compliance with regulatory and internal compliance mandates because alignment is coordinated;
4. Improved operational efficiency through more sustainable application of processes and risk control;
5. Enhanced workplace safety for employees and customers; and
6. A competitive differentiator in the market.

9. Risk Management Plan:
• A risk management plan outlines elements such as the organization’s risk approach, roles and responsibilities of risk management teams, resources to be used to manage risk, policies, and procedures.
• The 7-step ISO 31000 process is a useful guide to follow. Here is a summary of its components:
1. Communication and consultation
2. Establishing context
3. Identifying risks
4. Risk analysis
5. Risk assessment
6. Risk treatment
7. Monitoring and review

Risk Management Plan

• Risks falling in the green areas of the map require no action or monitoring. Yellow and orange risks require action. Risks falling in the red parts of the map require urgent action.

10. Conclusion:
• Risk management is the process of identifying, assessing, and controlling threats to the capital and profits of an organization.
• Risk management enables the success of the project.
• Employees can reduce the likelihood and severity of potential project risks by identifying them early. If something goes wrong, there is already an action plan to address it. This helps employees prepare for surprises and maximize project outcomes.
• A successful risk management program helps an organization consider the full range of risks it faces.
• Exposure to business risk is used to rank the probability of different types of losses and to determine which losses are acceptable or unacceptable.

Reference
• Orfea Dhuci — Njohuritë bazë për riskun dhe drejtimin e tij
• https://www.techtarget.com/searchsecurity/definition/what-is-risk-management-and-why-is-it-important
• https://www.clearrisk.com/risk-management-blog/risk-management-matters-for-all-employees-0-0-0-0#:~:text=Risk%20management%20enables%20project%20success&text=Employees%20can%20reduce%20the%20likelihood,unexpected%20and%20maximize%20project%20outcomes.
• https://trader.ftmo.com/equity-simulator