There are two main classifications of risk. All types of risks fall into either of the following category. Following are the two main types of risks:
1- Speculative Risks:-
Speculative risks are those risks which when undertaken can result in both a gain and a loss which could be unpredictable. These risks are not due to uncontrollable incidents but the one who indulge in speculative risks, do so consciously.
Speculative risk is where a director or a manager chooses to place money or other resources at risk. The objective of using capital in this way would be to make a profit or other gains. The manager must also recognize that what gains could be made and balance this with the ‘downside’ risk. For example Investment managers are continually monitoring the downside risk of their investments, as well as the opportunities for profit. Thus an investment manager would not only look at the potential for growth in individual investment but will also monitor the downside risk and whether there is an accumulation of any one single exposure across the investment portfolio. Currency risk or an over exposure to one particular trade or country can be the examples of such a wide ranging exposure.
2- Operational Risks:-
Operational risk is where something unplanned and unpleasant hits the organization itself and causes damages, disrupts or hurts its people. There are rarely very few chances of gain from such unpredictable event or occurring. These can also be said to as risks arising from process, people and systems. Fraud risks, legal risks, environmental risks etc are included in it.
In some circumstances businesses can prepare for the unexpected through insurance, other risk transfer mechanism, contingency planning and funding mechanism to cover the cost without distorting current trading of budget.
Basic Indicator Approach, Standardized Approach, Advanced Measurement Approach can be used for operational risk management.