Two Exercise

Determine which risk category/subcategory applies to the given events.

Due in 12 hours!!!

RCD Tool – Summarized (1)

Risk Categorization and Definition (RCD) Tool ‐ Summarized Version 
 

CATEGORY  Sub‐Category  Definition 
 

Copyright © SimErgy. All rights reserved. 
 

FINANCIAL   
A category of risks related to unexpected changes in external 
markets, prices, rates, and liquidity supply and demand. See also 
market risk, credit risk, and liquidity risk. 

FINANCIAL  MARKET 

Unexpected changes in external markets (such as stock markets), 
prices (such as commodity prices), or rates (such as interest 
rates), related to (a) general market movements (although the 
source for this is often economic risk) or (b) a specific asset on the 
company’s balance sheet. Some examples include equity market 
risk, interest rate risk, and currency risk. 

FINANCIAL  CREDIT 

Unexpected changes in credit markets (availability), prices (credit 
spreads), or credit‐worthiness of issuers, related to (a) general 
credit market movements (although the source for this is often 
economic risk) or (b) a specific issuer of a fixed‐income security 
on the company’s balance sheet or (c) a counterparty to whom 
the company has extended credit. 

FINANCIAL  LIQUIDITY 

Unexpected changes in liquidity supply or demand, related to 
three different levels of impact on the company: (a) untimely 
asset sales; (b) inability to meet contractual demands; or (c) 
default. A change in liquidity supply involves an unexpected 
change in the ability to sell assets as expected in the market, in 
terms of price, volume, or timeliness. A change in liquidity 
demand involves an unexpected change in demand for liquidity 
by option holders, such as 
bondholders exercising early put options or ‘‘run‐onthe‐bank’’ 
situations for financial services companies, where account 
holders suddenly request the withdrawal of funds from their 
accounts, en masse. 

FINANCIAL  ECONOMIC 

Unexpected changes in the economy. This is often the source of 
risk that triggers multiple simultaneous unexpected changes in 
other items, such as consumer disposable income (impacting 
demand for the company’s products or services), employment 
markets (impacting the company’s fixed expenses), 
inflation/deflation (impacting the company’s variable costs), 
items related to market risk, and items related to credit risk. 

STRATEGIC   
A category of risks related to unexpected changes in key 
elements of strategy formulation or execution. This is highly 
variable by company and must be customized. 

STRATEGIC  STRATEGY 

Viability of strategy—such as choice of products, distribution 
channels, markets, or value proposition— does not match 
expectations. This is highly variable by company and must be 
customized. 

STRATEGIC  EXECUTION  Strategy is not implemented as expected. Note: Execution risk is highly variable by company and must be customized. 
STRATEGIC  GOVERNANCE  Governance is not functioning as expected 

Risk Categorization and Definition (RCD) Tool ‐ Summarized Version 
 

CATEGORY  Sub‐Category  Definition 
 

Copyright © SimErgy. All rights reserved. 
 

STRATEGIC  STRATEGIC RELATIONSHIPS 
Unexpected change in strategic relationships (e.g., parent 
company or joint venture partner) 

STRATEGIC  COMPETITOR 
Unexpected change in competitive landscape, such as new 
entrants, aggressive competitor actions against the company, 
price wars, and so forth. 

STRATEGIC  SUPPLIER 
Unexpected changes in supplier environment, such as supplier 
capacity, supplier failure, or change in the cost of goods or 
services. 

STRATEGIC  EXTERNAL RELATIONS 

Unexpected changes in the company’s relationship with external 
stakeholders with public voices, such as the media, consumer 
advocates, equity analysts, rating agencies, regulators, and 
politicians. 

STRATEGIC  LEGISLATIVE/ REGULATORY  Unexpected changes in laws or regulations 

STRATEGIC  INTERNATIONAL 

Unexpected changes in the business environment of foreign 
countries in which the company operates, such as unexpected 
changes in the government’s stability, attitude toward foreign 
companies, and tariffs. 

OPERATIONAL   
A category of risks related to unexpected changes in elements 
related to operations, such as human resources, technology, 
processes, and disasters. 

OPERATIONAL  HUMAN RESOURCES 

Human resources (i.e., people) are not performing as expected, 
such as unexpected changes in talent management, performance, 
productivity, and conduct. 

OPERATIONAL  TECHNOLOGY  Technology not performing as expected. Some examples include data security, data privacy, data integrity, capacity, and reliability 
OPERATIONAL  LITIGATION  Unexpected civil suits or judgments against company 

OPERATIONAL  COMPLIANCE  Level of compliance not matching expectations (e.g., fines for noncompliance are higher than expected) 

OPERATIONAL  EXTERNAL FRAUD  Unexpected change in the amount of fraud by external parties. 

OPERATIONAL  DISASTERS 

Unexpected natural or man‐made disasters, such as weather‐
related (such as hurricane, flood, tornado, earthquake, and 
drought), health‐related (such as pandemic), accidental (such as 
fire), general acts of destruction (such as war, terrorism, and 
rioting), and specific acts of destruction against the company 
(such as product tampering, attack on employees, and sabotage). 
This also includes unexpected man‐made disasters caused by 
company employees or agents, such as environment damage. 

OPERATIONAL  PROCESSES  Processes are not functioning as expected (e.g., processes are too convoluted) 
 

__MACOSX/._RCD Tool – Summarized (1)

EXERCISE 2 – Spring 2021 Section 2 x

EXERCISE 2 – INDIVIDUAL

Categorize the following risks by source.

Event 1: Admiral Motor Company, a major U.S. automobile manufacturer, just received some bad news. The National Highway Traffic Safety Administration ordered Admiral to recall its best-selling line of sedans for violating fuel efficiency requirements for all new vehicles sold in the United States. An internal audit investigation at Admiral uncovered that the violation in fuel efficiency was attributable to the inferior quality of the intake valves being used in the vehicles. The manufacturer of the intake valves was changed right before the new sedans began to be produced. The new intake valve manufacturer had promised Admiral to produce the same quality intake valve as the incumbent manufacturer for half the price.
Event 2: Wycombe Welding reported an unexpected loss in its most recent financials. Wycombe’s management attributes most of the loss to a settlement of a class action lawsuit by former Wycombe employees alleging discriminatory hiring and promotion practices by the company. The lawsuit itself was not news and had been disclosed six months earlier. However, the amount paid by Wycombe to the plaintiffs was almost four times what Wycombe had previously signaled to investors.
Event 3: Wandavision Studios recently filed for Chapter 11 bankruptcy protection due to lagging sales of its high production cost blockbuster theatrical releases. While most of Wandavision’s competitors embraced the trend towards at-home entertainment streaming, either partnering with direct to consumer distributors or creating their own such platforms, Wandavision executives continued to pursue a strategy emphasizing movie theater distribution. Their rationale was that their CGI heavy productions are more impactful on a large theater screen than a home theater. With movie theaters struggling to keep customers, this resulted in much lower rights fees paid by theaters to Wandavision to show their highly acclaimed films.
Event 4: Bakasana Yoga Studio recently experienced a drop-off of 25% in class and workshop attendance. An internal investigation conducted by the studio owners discovered that the two main eastern spirituality websites selected for advertising Bakasana events were not receiving the level of internet traffic anticipated when Bakasana pivoted to an all-online advertising campaign. The two sites ranked in the bottom quartile in internet clicks received. Most of Bakasana’s new customers are now through word of mouth from satisfied existing customers.
Event 5: Endicon Energy recently unwound large long positions in oil futures, incurring a substantial loss. An analysis of what occurred did not uncover any major geopolitical event, weather anomaly, or business development that would cause such a rapid movement in oil prices. Endicon’s Corporate ERM Team concluded that the sudden drop in prices rather reflected a market correction after a steady increase over the previous three months.

Name: ______________________________________________

EVENT

Category

Sub-Category

Reason

1

2

3

4

5

Copyright © SimErgy. All rights reserved.

EXERCISE

2

–

INDIVIDUAL

Copyright © SimErgy. All rights reserved.

Categorize the following risks by source.

Event 1:

Admiral

Motor Company, a major U.S. automobile manufacturer

,

just received some bad news

.

The

National Highway

Traffic

Safety

A

dministration

ordered Admiral to recall its best

–

selling line

of

sedans

for violating

fuel efficiency requirements

for all new vehicles sold in the U

nited States

.

An

internal

audit

investigation

at

Admiral

uncovered that

the violation in fuel efficiency was attributable

to

the inferior quality of

the intake valve

s being used

in the vehicles

. The manufacturer of the inta

ke valves

was changed right before the new sedans began to be produced. The new intake valve manufacturer

had promised

Admiral to produce

the same quality

intake valve

as the incumbent

manufacturer

for

half

the price.

Event 2:

Wycombe Welding

reported a

n unexpected loss in its most recent financials.

Wycombe

’

s

management attr

ibutes m

ost

of the

loss to a settlement

of a cla

ss action lawsuit

by former Wycombe

employees alleging

discriminatory

hiring and promotion practices by the company. The lawsuit itself

was not news and had

been disclosed

six months

earlier

.

However, t

he

amount paid by Wycomb

e to

the plaintiffs

w

as

almost four

times what

Wycombe

had previously signaled to

investors.

Event 3:

Wa

nda

vision

Studios

recently

filed for Chapter 11 bankruptcy protection due to lagging sales of

its

high

production

cost

blockbuster theatrical releases.

While most of Wandavision

’

s competitors

e

mbraced the trend towards at

–

ho

me entertainment streamin

g

,

either

partnering

with direct to

consumer

distributors or creating their own such platforms, Wandavision executives continued to

pursue a strategy emphasizing movie theater distribution.

Their rationale was that their CGI heavy

productions

are more impactful on a large theater screen than a home theat

e

r

.

With

movie

theaters

struggling t

o keep customers, this resulted in

m

uch

lower rights fees paid by theaters to Wandavision to

show their

highly

acclaimed

films.

Event 4:

Bakasana

Yoga Studio recently experienced a drop

–

off of

2

5

% in

class

and workshop

attendance

.

An internal investigation conducted by the studio owners discovered that

the

two

main

eastern

spiritual

ity

websites

selected

for advertising Bakasana events were not receiving the

level of

internet traffic

anticipated when Bakasana pivoted to an all

–

online advertising campaign. The two sites

ranked in the bottom quartile in

internet clicks

received

.

Most of Bakasana

’

s new customers are now

through word of mouth from satisfied existing customers.

Event 5:

Endicon Energy

recently

unwou

nd large

long

positions in oil

futures

, incurring

a substantial loss.

An analysis of what occurred

di

d not uncover any major geopoli

ti

c

al

event

, weather anomaly, or

business development that would cause such a

rapid movement in oil prices. Endicon

’

s Corporate ERM

Team concluded that the

sudden

drop in prices

rather re

flected a market correction after a steady

increase

over the

previous three months.

EXERCISE 2 – INDIVIDUAL
Copyright © SimErgy. All rights reserved.

Categorize the following risks by source.
Event 1: Admiral Motor Company, a major U.S. automobile manufacturer, just received some bad news.
The National Highway Traffic Safety Administration ordered Admiral to recall its best-selling line of
sedans for violating fuel efficiency requirements for all new vehicles sold in the United States. An
internal audit investigation at Admiral uncovered that the violation in fuel efficiency was attributable to
the inferior quality of the intake valves being used in the vehicles. The manufacturer of the intake valves
was changed right before the new sedans began to be produced. The new intake valve manufacturer
had promised Admiral to produce the same quality intake valve as the incumbent manufacturer for half
the price.
Event 2: Wycombe Welding reported an unexpected loss in its most recent financials. Wycombe’s
management attributes most of the loss to a settlement of a class action lawsuit by former Wycombe
employees alleging discriminatory hiring and promotion practices by the company. The lawsuit itself
was not news and had been disclosed six months earlier. However, the amount paid by Wycombe to
the plaintiffs was almost four times what Wycombe had previously signaled to investors.
Event 3: Wandavision Studios recently filed for Chapter 11 bankruptcy protection due to lagging sales of
its high production cost blockbuster theatrical releases. While most of Wandavision’s competitors
embraced the trend towards at-home entertainment streaming, either partnering with direct to
consumer distributors or creating their own such platforms, Wandavision executives continued to
pursue a strategy emphasizing movie theater distribution. Their rationale was that their CGI heavy
productions are more impactful on a large theater screen than a home theater. With movie theaters
struggling to keep customers, this resulted in much lower rights fees paid by theaters to Wandavision to
show their highly acclaimed films.
Event 4: Bakasana Yoga Studio recently experienced a drop-off of 25% in class and workshop
attendance. An internal investigation conducted by the studio owners discovered that the two main
eastern spirituality websites selected for advertising Bakasana events were not receiving the level of
internet traffic anticipated when Bakasana pivoted to an all-online advertising campaign. The two sites
ranked in the bottom quartile in internet clicks received. Most of Bakasana’s new customers are now
through word of mouth from satisfied existing customers.
Event 5: Endicon Energy recently unwound large long positions in oil futures, incurring a substantial loss.
An analysis of what occurred did not uncover any major geopolitical event, weather anomaly, or
business development that would cause such a rapid movement in oil prices. Endicon’s Corporate ERM
Team concluded that the sudden drop in prices rather reflected a market correction after a steady
increase over the previous three months.

__MACOSX/._EXERCISE 2 – Spring 2021 Section 2 x