Question ID: XET 20.028 (Topic: E-H. Risk, Risk Frameworks, and Risk Management)

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  • #231920
    Bao Nguyen
    Participant

    Hi, 

    I would like to ask about this question: 

     Question ID: XET 20.028 (Topic: E-H. Risk, Risk Frameworks, and Risk Management)

    Which of the following would best describe a company’s risk tolerance?

    A. The risk committee makes a decision that the insurance policy will have a $150,000 deductible.

    C. The risk committee determines that if a fire were to happen, the company would be able to withstand a loss of $500,000.

    What is the difference between A and C please? In my view both of them are about the loss that the company has to be suffered when negative events occur. Thanks 

Viewing 3 replies - 1 through 3 (of 3 total)
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  • #231923
    Brian Hock
    HOCK international

    Hello, Bao Nguyen,

    Choice A is the risk tolerance – the amount of risk that they are willing to tolerate.

    Choice C is the example of the risk capacity. Risk capacity is the amount of loss that the company could sustain and still exist. But, even if they could withstand it, they may prefer not to have that much at risk, which is why the purchased the insurance with the $150,000 deductible. The $150,000 is the risk that they are willing to tolerate.

    Does this help?

    Brian

    #239071
    Magnus Teukam
    Participant

    Hello Sir,
    from the below question my understanding is that point ii and iii will have an effect on probability while point one is risk response and point iv on impact if a risk event occurs. please clarify through more light on the choice of response

    thanks in advance
    Magnus

    It is common to access risk based on the probability of the risk to occur and the impact on the operations, if risk event does occur. Which of thw following items are influences of probability?

    I – The company uses the derivative market for both hedging and speculative purposes
    II – Top management practices what it preach concerning the need for strong controls.
    III – Top management is particularly concerned about damage of its brand name.
    IV – The cost to get operation back to normal is significant

    A – II and IV
    B – I and II
    C – III and IV
    D – I and III

    #239078
    Brian Hock
    HOCK international

    Hello, Magnus,

    Choice I has to do with probability because of the fact they use derivatives for speculation. Speculation will increase the probability of something going wrong.

    Choice II will reduce the probability because management will have good controls in place.

    Choice III – the damage that would occur is connected to the impact of the risk event happening. I could see that you might say that if they are concerned about this risk, they will do things to manage it. But, that is secondary and there is no choice for I, II and III.

    Choice IV is about the impact of the risk.

    I hope that this helps.

    Brian

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