Risk management

Risk management risk management is a structured approach to managing uncertainty relating to a threat through a sequence of human activities including the identification, analysis and evaluation of risk, to later establish the strategies of its treatment using managerial resources. Strategies include transferring the risk to another party, avoiding the risk (that is, reducing its probability or impact to 0), reducing the negative impact of the risk, and accepting some or all of the consequences of a particular risk through an informed decision.

Sometimes, risk management focuses on containing risk from physical or legal causes (for example, natural disasters or fires, accidents, death, or lawsuits). On the other hand, financial risk management focuses on the risks that can be managed using financial and commercial instruments.

The objective of risk management is to reduce different risks related to a pre-selected field to a level accepted by society. It can refer to many types of threats caused by the environment, technology, humans, organizations, and politics. On the other hand, it involves all available resources of human beings or, in particular, of a risk management entity (person, work group, organization).

Thus, enterprise risk management or enterprise risk management (ERM) is a process carried out by the board of directors of an entity, the administration and the staff of said entity. It is applied in the establishment of company-wide strategies, designed to identify potential events that may affect the entity and manage risks to provide reasonable assurance and integrity regarding the achievement of objectives. In risk management in business trips, you should start with a prior evaluation of the trip and an analysis of the situations that may occur during the trip. Subsequently, policies will be designed to reduce the risks detected and, finally, the Business traveler must be insured against risks that were not detected or impossible to eliminate previously.

Types of financial risks

• Market risk, as a result of fluctuations in financial markets, and distinguishing:
  • Risk of change, consequence of currency market volatility.
  • Risk of interest rate, consequence of the volatility of interest rates.
  • Market risk (in restricted meaning), which refers specifically to the volatility of financial instruments markets such as shares, debt, derivatives, etc.
• Credit risk, resulting from the possibility that one of the parties to a financial contract does not assume its obligations.
• Risk of liquidity or financing, and which refers to the fact that one of the parties to a financial contract cannot obtain the necessary liquidity to assume its obligations despite having the assets — which cannot be sold sufficiently quickly and at the right price — and the will to do so.
• Operating risk, which is defined in the Basel II agreement used for the regulation of the banking sector in Europe as "the risk of loss due to inadequacy or failures of processes, staff and internal systems or because of external events". This definition includes legal risk, and excludes risks classified as strategic and reputational.
• Quantitative Magnitudes of Risk: VaR. All types of risks discussed in the preceding paragraphs have been taken into account by the participating entities in the markets and highlight the need for tools to determine quantitatively (in monetary units) the risk assumed by integrating a new asset into the portfolio. This is how the VaR (Value at Risk), which offers a quantitative and objective measure of the value at risk of a portfolio for normal (ordinary) market conditions.

Related regulations

Both internationally and nationally, regulations related to the matter have been created, generally in two ways: regulations related to risk management principles and good practices, and specific regulations by economic sector or industry. As an example, the following can be cited:

• ISO 31000/2018: standard related to general principles of risk management published by the International Organization for Standardization or ISO. The previous version corresponds to 2009.
• Basel Committee Regulation on Banking Supervision, Bank for International Settlements on Measuring and Standards on Minimum Capitals of Financial Institutions for Certain Risks.
• In Argentina there are non-binding standards issued by the Argentine Institute for Standardization and Certification related to the design and implementation of a comprehensive risk management system, and specific regulations on the management and funds that banks must affect so that the entity can face certain risks, issued by the Central Bank of the Argentine Republic.
• Globally there is a generally accepted policy for risk management and management: risk management ERM FRAMEWORK, produced by The Committee of Sponsoring Organizations of the Treadway Commission (COSO). This framework of action is divided into four risk classes, eight essential elements for successful management and structural levels for implementation.
• The Water Safety Plans are applied in the water supply sector for human consumption.