5. Financial Risk Management

Question 1

Name three types of exposure that derivatives can cover?

Answer 1

1. Interest rates
2. Foreign exchange rates
3. Commodities

Question 2

Name five factors that will influence the implementation of financial risk management?

Answer 2

1. Financial systems & internal controls
2. Reporting tools
3. Cash budgets
4. Credit insurance
5. Due diligence

Question 3

Mitigation of … risk is the payment of debts when they fall due. This can be achieved by using a cash budget.

Answer 3

Liquidity

Question 4

What are some of the factors that the rate of interest depends on?

Answer 4

1. Amount
2. Term
3. Inflation
4. Risk

Question 5

What are the benefits of good financial risk management:

Answer 5

1. Improves financial planning
2. Facilitates robust investment decisions
3. Informs hedging decisions
4. Encourages monitoring of markets

Question 6

What does a company need to know before they borrow money?

Answer 6

1. How interest rate was determined
2. Interest rate at commencement
3. Nature of interest rate (fixed or variable)
4. Duration of payment

Question 7

… is the risk to each party of a contract that the counterparty will not live up to its contractual obligations.

Answer 7

Counterparty risk

Question 8

… is the mitigation action for credit risk.

Answer 8

Credit insurance

Question 9

… is the financial loss suffered due to the default of a borrower or counterparty under a contract.

Answer 9

Credit risk

Question 10

… focuses on the possible impact which fluctuations in exchange rates may have on the foreign exchange holdings or the commitments payable in foreign exchange.

Answer 10

Currency risk

Question 11

… ratio is the relationship between current assets and current liabilities.

Answer 11

Current

Question 12

… is the probability of the event of default.

Answer 12

Default risk

Question 13

… are financial products derived from some other existing product. Examples include options, futures and swaps.

Answer 13

Derivatives

Question 14

… generally refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

Answer 14

Due diligence

Question 15

… relates to the uncertainty surrounding the payment of future amounts.

Answer 15

Exposure risk

Question 16

… is the exposure of an enterprise to adverse events that erode profitability and in extreme situations bring about business collapse.

Answer 16

Financial risk

Question 17

… risk focuses on the possible risks that arise when a business pursues opportunities abroad.

Answer 17

Foreign investment

Question 18

… is the risk that a business will be unable to obtain funds to meet its obligations as they fall due either by increasing liabilities or by converting assets into money without loss.

Answer 18

Liquidity risk

Question 19

… ratio is a liquidity indicator that further refines the current ratio by measuring the amount of the liquid current assets available to cover current liabilities.

Answer 19

Quick

Question 20

… relates to the uncertainty over the likely recovery.

Answer 20

Recovery risk