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How to Estimate Risk? Risk Value = Probability of Event x Cost of Event
It's broad Question & so complex.
simply Calculate the event bear risk. To calculate risk & weight, should be considered previous year DATA, how mutch risk might not have outcome and cost of this outcome is estimated risk. Value of probability of the event which might not have output.
There are many various risks and can be measured in different ways where they can use the failure of financial models such as Altman and Sherwood and Kedah and financial analysis can be used to access and followed these risks
I agree with above formula but i think we should prepare a Risk Rating Checklisk to estimate the risk at premature stage.
Every risk can not be estimated. Risk estimation is based on assumption. There are various types of risks and risk nature is different in different sectors. Like risk in insurance industry is different from risk in banking sector. I would give an idea of risk estimation of credit in banking.
Credit risk in banking industry means risk arising out loans extended by banks. Loans are broadly of two types secured and unsecured.
Secured loans means loan secured by some kind of security like property. Unsecured loans means , loans extended without security like credit cards.
Now suppose a bank has the following exposure/loan portfolio:
Secured loans 100M backed by security (property) of value150M
Unsecured loans 10M
Risk caculation:
Risk for secured loans is zero0 as value of security is more than loan.
Risk for unsecured loan is 10m equal to unsecured exposure
Total credit risk for the bank is10M
I have explained risk calculation in a very simple way just to give an idea. In real situation it involves a lot of caculation and risk modeling.
Risk Estimation should be the determination of quantitatiive and qualitative value of risk related to an event. But it is essentIal to set risk apetite first.
