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Residual Risk (Definition, Example) | How to Calculate Residual Risk? - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
WallStreetmojo today we have a topic
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with us is called residual risk watch
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so what is residual risk okay this is a
dialogue box here it says something
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let's try and understand this first
let's see what risk is the amount of the
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risk that remains in the process after
all all the risks have been calculated
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and accounted in head residual risk is
basically you have tried and cover up as
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much as possible if you have tried and
hedged as much as possible covered up
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mitigated risk to the extent that is the
risk of cover possibility but beyond that
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whatever risk remains that is a residual
risk okay we'll get to the nitty-gritty
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of this but first we will try and
understand what is the residual but
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first we will understand what is the
residual risk couple of minutes that we
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just understood what is receded residual
risk that is the risk that remains the
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process after all the risk having
calculated accounted hedge during an
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investment with the business process
there are lot of risk that is involved
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and in the entity that takes into
consideration all such errors so it
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counter factors or you can say that or
eliminates all the known risks of the
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process so this risk that remains in the
process may be due to unknown factors
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which cannot be hedge or counter so
such risk are called the residual risks so
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simply put the danger to the business
that remains after all identified risk
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have been eliminated or mitigated
through a company's efforts or probably
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some internal risk control well let's
understand the formula that's the second
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portion the formula to calculate the
residual
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the residual risk is equal to that is
the R is equal to the inherent risk that
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is the you can say our R-R is equal to
inherent risk - the impact of risk
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controls now what is inherent risk here
see this is the amount of the risk that
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exists in the absence of the control or
other mitigating factors are not in
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place it is also known as the risk
before the control or the cross risk now
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the impact of risk controls though what
is this in fact over is control so this
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is the amount of the risk that is
eliminated it is mitigated or hedged by
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taking the internal or the external risk
control so this when the impact of the
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risk control is subtracted from the
inherent risk the residual amount that
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remains is the is this risk so let us
look at risk yield risk sample so that
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we can find out what the residual risk
could be for the organization in terms
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of the potential loss and consider you
know the form which has recently taken
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up any project so without any risk
control the form could could lose around
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let's say 500 million so however you
know the form prepares and follows the
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risk governance guidelines and takes
necessary steps calculated the residual
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risk and it tries to mitigate some of
the known risk but after taking the
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internal control the firm is calculated
the impact to the risk control as
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closely around let's say 400 million so
this impact can be said that as the
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amount of the risk loss reducing by
taking the control measure so it is
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reduced to from 500 to 400 it
now the inherent risk is 500 this is
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your inherent risk and the impact of the
risk control the impact of the risk
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control is the is 400 does the residual
risk that remains is 500 - 400 that is
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100 million so the residual risk
examples as a residual risk example you
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know takes I'll try and evaluate this
see you can consider the car seat belt
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as a very vague example I mean seat belts initially without the seat belts they
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were Lord of deaths and injuries due to
the accidents but after the seat belts
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were installed in the car and made
mentally to where by the law was a
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significant reduction in deaths and
injuries however still there are
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injuries and deaths by accidents even
after the driver wears the seatbelts so
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this could be say that as a residual
risk so the seatbelt over you have been
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successful in meeting mitigating the
risk but some risk is still lift which
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is not captured that is why there is
death by accidents fourth how the
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companies try to mitigate risk how they
are gonna mitigate this okay the company
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deals with risk in 4 ways while the
company tries to mitigate risk by any
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other ways there are some amount of this
amount of this recipient rate and this
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4 ways are described as first either
you avoid the risk C companies may
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decide to not take on the project or the
investment to avoid the inherent risk in
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the project so a company may decide to
knocked it should not take a project or
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to develop a technology but because of
the new risk that company may be exposed
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to however in avoiding such risk become
he may be exposed to risk of the
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competitor form
developing such a technology so the
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company will lose its clients and
business in may be post to the threat
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of being less competitive
after the competitor forms develops new
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technology thus avoiding some risk makes post the company to different residual
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risk second is the risk reduction
process see Company performs a lot of
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checks and balances in introducing a
risk however such risk reduction factors
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makes post the company in to return to
residual risk in the process itself
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consider the production and
manufacturing of a cup which has their
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list of procedures to be performed in
the manufacturing which checks the risk
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involved at each stage of process
however the human or the manual error
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exposes the company to such risk which
may not be mitigated easy so avoid the
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risk risk reduction you can transfer the
risk and next risk transfer for CC most
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of the companies and individuals buy
insurance okay the insurance plans from
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the insurance company to France for any
kind of risk to the third party so when
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buying an insurance plan is the basic
tool to mitigate all type of risk but it
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too has some amount of residual risk now
suppose let's say company buys an
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insurance scheme for fire they let a
disaster however the insurance company
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refuses to pay damages or probably the
insurance company goes bankrupt due to
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high numbers of claims for the other
reasons so the risk transferred did not
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work as it was expected while buying the
insurance plan fourth is you accept the
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risk that is risk acceptance see after
taking all the necessary steps as
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mentioned about the investor may be
bound to accept the certain amount of
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risk and this is called a scripts
acceptance where the investor may
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neither be able to identify the risk nor
can mitigate or transfer the risk but
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will have to accept it also you will
have to pay or incur some you know
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losses if the risk materializes into
losses and such a risk rips acceptance
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is generally in the case of residual
risk or we can say that in orders which
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is accepted by the investors after
taking all necessary steps into residual
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risk now I'll take you down to these
steps to counter this kind of residual
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risk
first you can identify and mitigate all
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the known risk identify and you know
mitigate that is cover up all the known
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risks that is available to you then
follow the risk framework framework okay
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to avoid any loss or damages then you
identify the governance risk
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comply
hands requirement you know and and
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formulate policies for the city then you
do strengthen or and weakness part you
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know we can this of the risk framework
and try to enhance it now define no
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organizations risk appetite is the next
part its capacity to take risk and
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resilience to losses in case of an event
the next says you know you can take
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necessary action to offset the
unacceptable you know unacceptable the
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risk Linux is you can buy insurance
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against the losses to transfer the risk
and lastly the organization should
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accept the risk as it is and maintain
the resource buffer so residual risk are
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the leftover risk that remains after all
the unknown risk that have been factored
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in and counted a litigated and they can
also be thought of as a risk that
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remains after a planned risk framework
and relevant risk controls are put in
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place and you subtract the impact of the
risk control from the inherent risk in
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the business
we hear that is without any risk control
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is issued you calculate the residual
risk so this kind of risk can be
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formally be avoided by transferring it
to the third-party insurance company and
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in cases where no insurance is taken
again such risk the company usually
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accepts it as a risk to the business and
it creates contingency reserves to mean
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manage this risk and those company
either transfers I'll say a company can
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either transfers or accepts the residual
risk as a part of the business so that's
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