Assessment – Wayne Penello & Andrew P. Furman

Our lives are filled with uncertainty. If not managed, uncertainty is a gamble. Managed, it becomes a risk with an acceptable range of possible outcomes. When managed with a deliberate process it can become a calculated risk—not guaranteeing returns but allowing an expectation to deliver benefit over time. Chances are the techniques you’ve been taught to manage risk will reduce your exposure to negative events, but they fail to elevate the performance of your business. This brief assessment is designed to identify whether Process Risk Management (PRM) can help increase your confidence in, and enhance the success of, your business.

Complete the following sentences with the answers that most closely reflect your current situation. Approach all 12 questions with honesty, and remember, there are no wrong answers.

1. What is the difference between a risk and a gamble?*
- Nothing
- The payout profiles
- Whether the risk can be managed
- Whether or not you manage the risk

2. Is randomness manageable?*
- No
- It can be reduced, but not managed
- yes, with good fundamental research
- Yes, with a process

3. How often do you perform risk analysis for your business?*
- Never
- Weekly
- Monthly
- When we are pulling together a budget

4. How do you measure risk?*
- As a % of the current prices
- In $/unit for the budgetary period in question
- Develop base and risked budgetary performance estimates by committee
- Develop base and risked budgetary performance estimates using an independent process

5. How do you establish your hedge objective/target(s)?*
- Hedge what the banks require
- Reduce a proportionate amount of risk
- Hedge to achieve budgetary success
- Hedge only when prices are attractive

6. When do you place defensive hedges?*
- Only when prices are attractive
- When we are concerned about prices
- Systematically at regular intervals
- When risk exceeds tolerance

7. Do you optimize the timing of your hedge executions?*
- No, we just get it done once the decision has been made to hedge
- Yes by only hedging on those days when the market has moved favorably for us
- Yes, we target a price and hedge only when we get it
- Yes, by considering the cost/benefit of waiting for a better price

8. What is your favorite hedge instrument?*
- Swaps
- Collars
- Floors or caps
- No preference

9. How often do you update your risk measurements?*
- When we set a budget
- After we hedge
- When the market makes a big price move
- Every month

10. When should businesses consider hedging?*
- When prices are attractive enough to enhance performance
- When risk estimates threaten our bottom line
- When it will ensure budgetary targets will be met
- All of the above

11. Do you hedge the same way when prices are high as you do when prices are low?*
- Yes, we have a disciplined approach
- No, we won't hedge unless we like the prices
- It depends
- We use the same process, one that allows us to strive for budgetary success.

12. Assume two peer group firms have similar assets of equal value, except that one is without debt and the other firm has borrowed half of the money needed to buy its assets. Which of these two firms is more likely to need a hedge program?*
- Not enough information
- Neither
- The firm without debt
- The firm with debt

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