BEC 1 - Financial Risk Management

Question 1

2 broad categories of risk (DUNS)

Answer 1

1) Diversifiable Risk
= Unsystematic risk (nonmarket/firm-specific)
2) Nondiversifiable Risk
= Systematic risk (market)

Question 2

Effective Interest Rate

Answer 2

Interest paid per period (or P x SAR/ # of periods)

/ Net proceeds of loan, reduced by charges and fees

Question 3

Interest Paid per Period

Answer 3

P x SAR / # of periods

Question 4

Annual Percentage Rate

Answer 4

Effective (periodic) interest rate x # of periods in a year *non compounded

Question 5

Effective Annual Percentage Rate

Answer 5

(1 + effective rate)^# of periods - 1

Question 6

Simple Interest

Answer 6

P x SAR x # of years

*non compounded

Question 7

Compounded Interest

Answer 7

P x (1 + effective rate)^total # of periods

Question 8

Mitigating transaction exposure through a call option

Answer 8

Puts a cap on cost. Use to mitigate risk of Import/AP going up in value

Question 9

Mitigating transaction exposure through a put option

Answer 9

Puts a floor on revenue. Use to mitigate risk of Export/AR going down in value

Question 10

Futures vs forward contracts

Answer 10

Forward contracts are used for larger groups of transactions while future contracts hedge a specific transaction

Question 11

Operating Leverage

Answer 11

The presence of fixed costs in operations, which allows a small change in sales to produce a larger relative change in profits

= FC / TC

Question 12

A higher degree of operating leverage when compared to the industry average implies that

Answer 12

The firm is more sensitive to changes in sales volume

Question 13

Transaction exposure

Answer 13

The risk faced by an entity that encounters the possibility that the currency in which a transaction is denominated will be negatively impacted

Question 14

Translation exposure

Answer 14

The gain or loss generated from the conversion of financial statements from one currency to another