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Question #1 Choose the correct answer

Please answer the following questions:

Question #1 Choose the correct answer

1) Pure Risk is defined as:

A) An event that offers no opportunity for financial gain

B) The chance a loss will occur

C) A diversifiable risk

D) A contingency that increases the chance of a loss

2) All the following are direct losses except:

A) A car is stolen

B) A house suffers flood damage

C) An apartment must be rented after a house is destroyed by fire

D) A business loses $100,000 in a law suit

3) All the following are direct losses except:

A) A house is burglarized

B) A store loses $200,000 in sales because a fire closes it down for two weeks

C) A corporation must pay $1 million in ransom when its CEO is kidnapped

D) A delivery truck needs $15,000 in repairs after a collision

4) Which of the following is not an example of a Catastrophic Loss Event?

A) Hurricane Katrina

B) Donald Trump assigned president of the united states

C) September 11, 2001 terror attacks

D) 2004 Tsunami in the Indian Ocean

5) Which of the following is not a method of protection of risk?

A) Group insurance plans

B) Employee benefits

C) Social insurance

D) Humanitarian aid

6) Which of the following is not a hazard?

A) Storing one ton of dynamite in a garage

B) Unhealthy habits (eating lots of junk food and smoking)

C) Skating on thin ice

D) Getting shot accidentally while deer hunting

Question #2

The above figure represents a simple supply chain for a restaurant; you are required to name 2 risks that may occur at every stage of this supply chain and how you would manage or avoid this risk. (Only two risks per stage is required)

Question #3 

As a financial risk consultant your client comes to you with two projects, he intends to choose only one to invest in

Project X                                                                             Project Y

Initial investment = $10,000                                    Initial Investment = $15,000

Annual ROI = 10%                                                      Annual ROI = 12%                             

Returns: Year 1 = $5,000                                           Returns: Year 1 = $4000

Year 2 = $6,000                                                                             Year 2 = $6000

Question #2

Year 3 = $7,000                                                                             Year 3 = $8,000                         

Question #4

Briefly answer the following questions according to your understanding of the course:

1. Which offers a better investment plan, Simple or compound interests? Explain why!

2. What are the main steps of managing risk? List and explain each step!

3. Explain both Market and liquidity risks, give one example for each.

Question #5

Elizabeth Taylor’s wedding “case study”
Ground Rules
There are not many ground rules for the exercise.

1. The facilitator must try to convince everyone to participate and try not to let one person dominate the discussion.

2. No risks should be rejected. Part of the fun is to have the participants think up things that could happen at the wedding that are a bit on the absurd side.

3. To limit the number of risks the participants must limit the risks to those that can occur on the day of the wedding.

4. The participants must be reminded that when they identify a risk it should be stated in a way that it can be quantified.

Project Description

It is spring and Elizabeth Taylor has decided to tie the knot and get married once again. This will be Liz Taylor's 9th marriage. That is if you count her marriage and remarriage to the same person as separate marriages. She married Richard Burton two times, in 1964 and again in 1975. They were of course separate weddings. Liz wants the wedding to be a great success because it may be her last shot at happiness and it may be her last chance to have a really big wedding.

As the project manager you are responsible for the events that take place on the day of the wedding. You are not responsible for the events that take place prior to and after the wedding. You are not responsible for the prenuptial agreement, purchasing the wedding rings, inviting the guests or arranging for the honeymoon. You are responsible for arranging all of the events that take place on the day of the wedding. These include, but are not limited to, making arrangements for the following:

CHOOSE 1 CATEGORY

Food

Catering food in the welcoming area, the wedding area, the entertainment area

Catering a sit down dinner after the wedding

Main wedding cake and mini wedding cakes for each table

Beverages

Providing alcoholic and non-alcoholic drinks in all areas

Entertainment

Small band music prior to the wedding

Dance music after the wedding

Michael Jackson and his backup band

The New York Philharmonic Orchestra

The Blue Angels

Party Favors

Small gift for each of the guests

Larger gift for each of the members of the wedding party

Small gifts for staff

Large gifts for local police

VIP Transportation

Special transportation for distinguished guests:

President of the United States

Yasser Arafat of the Palestinian government

Queen Elizabeth II of Great Britan

President Putin of Russia

Former President Jimmy Carter

Former President Gerald Ford

Donald Trump

14 United States Senators

114 United States Congressmen

The Gotti Family

Debbie and Kelly O'Bray

Cathy Tonne

Security

Perimeter security from paparazzi

Internal security for unruly guests

Terrorist attacks

Contamination of food and drink

Air security

Parking lots

Medical Care

Emergency medical staff

Emergency infirmary

Private Doctor for bride and groom

Clothing

Liz Taylor's dress

Groom's clothing

The wedding party

Dressers for hair, make up and clothing

Location

The wedding is to take place outdoors at Liz Taylor's mansion which is on 10 acres of landscaped lawns and gardens in Beverly Hills, California.

Decorations

Flowers and decorations inside house

Flowers and decorations outside house

Wedding flowers for Bride

Flowers for wedding party

Question #1 Choose the correct answer


Question # 1

1) Pure Risk is defined as:

A) An event that offers no opportunity for financial gain (Munthe, 2011)

2) All the following are direct losses except:

C) An apartment must be rented after a house is destroyed by fire

3) All the following are direct losses except:

B) A store loses $200,000 in sales because a fire closes it down for two weeks

4) Which of the following is not an example of a Catastrophic Loss Event?

B) Donald Trump assigned president of the United States

5) Which of the following is not a method of protection of risk?

D) Humanitarian aid

6) Which of the following is not a hazard?

D) Getting shot accidentally while deer hunting

Question #2

As per the given layout for the supply chain of the restaurant, the risks at various stages have been stated in the table below, with the approaches of mitigation of risks:

Stages of Supply Chain

Risk I

Risk II

Risk

Mitigation

Risk

Mitigation

Stage of Harvesting

The risk of crops or raw material for food might get spoilt by natural factors (Akter, Hussain and Hussain, 2008)

The risk can be covered by insurance

The risk of crops or raw material for food might get spoilt by rodents, insects or pests

Application of insect ides or pesticides

Stage of manufacturing

Food safety risk might exist with supplier

Due diligence must be done

Making/ manufacturing deviates from the SLAs and standard procedures

Ongoing monitoring of the manufacturing process

Stage of distributor

Inconsistent and irregular distribution by suppliers

Integrating technology in distributorship

The staffs with the distributor segment can make mistakes, as it is a human tendency to make mistakes.

Proper training of staffs carrying out distributorship

Stage of restaurant

Risk that the goods and materials received are not of good quality

This can happened if there are various layers of suppliers or a complex network, so the simple way is to keep the supply chain as a straightforward one

Excessive or too less materials or products are ordered and this happens when restaurant manger does not regularly track and monitor the stock, and then place wrong order.

Proper and timely monitoring and stock-estimation is needed

Customer stage

Risk of health and safety of clients

The local health and safety codes need to be followed to ensure that the operations comply with them.

Risk that employees don’t handle food supplies in right way, while storage & preparation

Following of storage protocols is necessary.


Question #3

As a financial risk consultant your client comes to you with two projects, he intends to choose only one to invest in

Project X                                                    Project Y

Initial investment = $10,000                                    Initial Investment = $15,000

Annual ROI = 10%                                                      Annual ROI = 12%                             

Returns: Year 1 = $5,000                                           Returns: Year 1 = $4000

Year 2 = $6,000                                                                             Year 2 = $6000

Year 3 = $7,000                                                                             Year 3 = $8,000    

Payback period

Project X

Project Y

Payback period = Initial investments/net average annual cash flows (Systemic financial risk, 2012)

average annual cash flows =

($5,000 + $6,000 + $7,000)/3  = $6,000

average annual cash flows =

($4,000 + $6,000 + $8,000)/3 = $6,000

Payback period =

= $10,000/ $6,000

= 1.66 years

= 20 months

Payback period =

= $15,000/ $6,000

= 2.5 years

= 30 months

So Project X is chosen, because as per the payback period method, Project X will pay back in 20 months, which is much earlier than the Project Y.

Net present value= {cash flow for year 1/(1+i) +cash flow for year 2 /(1+i)2.................}-initial investment (Smith, 2015)

= {($5,000/1.1)+ ($6,000/ 1.12) + ($7,000/1.13)} - $10,000

= $5,500+ $7,260+ $9,317 -$10,000

= {($4,000/1.12)+ ($6,000/ 1.122) +($8,000/1.123)} -$15,000

= $4,480 + $7,526.4 +$ 11,239.424 - $ 15000

= $12,077

= $8,245.824

So, project X is chosen, because as per the Net present value method also project has higher NPV than project Y.

Question #4

1. Which offers a better investment plan, Simple or compound interests? Explain why!

For the investment plans, compound interest is better as it lets finances to mature at a quicker pace than they would in an account with a simple interest rate (Virgo, 2007). Compound interest is useful for assessing the yearly percentage yield.

2. What are the main steps of managing risk? List and explain each step!

For managing the risks, below given steps need to be followed:

1. Identification of risk: The risks affecting the project have to be recognized. To identify the project risks, various techniques have to be used. Also while this step, project risk register has to be prepared.

Question #2

2. Analysis of risk: After identifying the risk, the probability and outcome of every risk has to be determined. There has to be understanding of kinds of risk and its probability to impact the goals. The same information is recorded in the Project Risk Register (Douglass, 2009).

3. Assessment / ranking of risk: the scale of risk is determined for ranking of risk. There is a mix of probability of risk and its impact. It informs if the risk is tolerable or it is serious for warranting the treatment. These ranks are recorded to the Project Risk Register.

4. Treatment of the risk: It is known as risk response planning step. The highest ranked risk is assessed and a plan is made for treating or changing the risks so that tolerable risk levels are attained. The risk mitigation approaches, preventive strategies and contingency plans are made (Uzul?ns, 2016).

5. Monitoring and reviewing the risk: In this step, the project risk register is utilized for monitoring, tracking and reviewing the risks.

3. Explain both Market and liquidity risks, give one example for each.

Market risk is the likelihood of an investor facing losses because of aspects that have an effect on the general performance of the financial markets in which he or she is caught up. It is also known as "systematic risk," and it cannot be removed by diversification, although it can be hedging can be done for it. It is inescapable in every risky investment. It can also be considered as the opportunity cost of placing funds at stake (Anthonisz and Putni?š, 2012).

For example, Option X is a venture of $500 within a risk-free, FDIC-insured Certificate of Deposit. Option Y is a venture of $500 in SPY, the ETF that plans the S&P 500 Index. If the probable income from Option X is 1%, and the likely income on Option Y is 10%, investors are asking for 9% to shift their funds from a risk-free venture to a risky equity venture.

Liquidity risk usually comes up when a company or person with immediate monetary needs possesses a valuable asset that it cannot deal or vend at market value because of inadequate number of purchasers, or because of an unproductive market where it is hard to bring together purchasers and sellers.

For example, a $1,000,000 building has no purchasers. The building clearly has worth, but because of market situation at the point, there might be no interested purchasers. In improved economic period when market circumstances get better and demand rises, the building might sell much beyond that price. though, because of the building owner’s requirement of cash to fulfill close term financial demands, the owner might be not capable of waiting and have no other option but to put the building up for sale in an illiquid manner.

Question #5

Risk Description

Impact

Severity

Rank

Type

Solution/Contingency

Over estimation of drinks usage/ number of guests

Wastage

high

2

Estimation risk

Proper assessment of guest need to be done

Under estimation of drinks usage/ number of guests

Inadequacy/ loss of reputation

High

1

Estimation risk

Proper assessment of guest need to be done

Quality supplied is not as per standard

Loss of reputation

High

3

Market risk

The supplier has to be chosen as per the quality standards of beverages required

References

Akter, S., Hussain, B. and Hussain, M. (2008). Economic valuation of health risk exposure of restaurant users in Dhaka city. Health, Risk & Society, 10(2), pp.181-193.

Anthonisz, S. and Putni?š, T. (2012). Asymmetric Liquidity Risks and Asset Pricing. SSRN Electronic Journal.

Douglass, M. (2009). 10 steps to managing risk in long-term care. Perspectives in Healthcare Risk Management, 12(3), pp.15-21.

Munthe, C. (2011). The price of precaution and the ethics of risk. Dordrecht: Springer.

Smith, K. (2015). The Financial Economic Risk in Financial Engineering Models. Wilmott, 2015(79), pp.50-55.

Systemic financial risk. (2012). Paris: OECD.

Uzul?ns, J. (2016). Project Risk Register Analysis Based on the Theoretical Analysis of Project Management Notion of Risk. Economics and Business, 29(1).

Virgo, G. (2007). COMPOUND INTEREST MADE SIMPLE. The Cambridge Law Journal, 66(03).

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