ERM - Ent. Risk Mgmt.

Question 1

COSO ERM framework identifies two types of risks?

Answer 1

COSO ERM framework identifies two types of risks
1. residual risk
2. inherent risk

Inherent risk: risk that exists before mgmt. takes any mitigation
steps

Residual risk remains after mgmt. responds to inherent risk

Unknown risk is not a a part of the ERM framework

Question 2

Oligopolistic vs monopolistic firms

Answer 2

Oligopolistic vs monopolistic firms

Oligopolistic
interdependence
small number of large firms

monopolistic
no interdependence
larger number or small competitors

Question 3

Monopolistically Competitive vs Perfectly
Competitive

Answer 3

Firms in Monopolistically Competitive industries
1.produce differentiated products
2. engage in non price competition
3. face downward facing demand curve

Firms in a perfectly competitive industry
1. produce a standardize product
2. find non-price competition ineffective
3. face perfectly elastic demand curves

There is no significant barrier to entry in either market structure

Question 4

Perfect competition / Oligopolies

Answer 4

Perfect competition
1. large number of small sellers of a standardized product
2. Company has not influence over price
3. No barriers to entry, easy entry/exit
4. Each indivual firm produces a small portion of the total output

Farmers produce commodities and commodities are a reflection of
perfect price competition

Oligopolies
Department stores
automobile manufactures
corporate fast-food

Question 5

Audit Committee

Answer 5

Audit committee
Independent of the corporation, structure designed for independence
from management

Audit committee -
1.oversees financial reporting process
2. monitor the choice of accounting policies and principles
3. monitor the internal control process
4. appoint, oversee, the external auditors
5.recieve communications and audit reports directly from the auditors

Question 6

Foreign Exchange Markets

Answer 6

Foreign Exchange Markets
1. Spot transactions
2. Futures contract (future date)
3. Forward contracts(custom contract, forward)

Question 7

Working Capital / Current Ratio

Answer 7

Working Capital =
Current Assets - Current Liabilities

Current Ratio=
Current Assets / Current Liabilities

Plant and Equip. is a long term asset
Bond Sinking fund is not a current asset

Question 8

Wholesale price index (WPI)

Answer 8

Wholesale price index (WPI)
1. change in prices at the wholesale level

Price increased are generally passed onto consumers
therefore, WPI is an early predictor of consumer
price index (CPI)

WPI predicts CPI which predicts inflation

Question 9

Equity Risk Premium

Answer 9

Equity Risk Premium
- excess return that investing in the stock market provides over a risk free rate

Liquidity - ease of turning a security into cash

Seniority - order of repayment in the event of
bankruptcy

Earnings per share is not relevant is determining the risk premium of a specific security

Question 10

Leading/Lagging indicators

Answer 10

Leading indicators
- precede the establishment of new economic activity, high correlation with GDP
1. New orders for goods
2. Bldg permits
3. Changes in unfilled orders for durable goods

Lagging indicators
1. Unemployment
2. Avg. prime rate change, also lagging
3. Results of decisions requiring clear knowledge of the economy

Question 11

Monetary Policy to control inflation

Answer 11

Monetary Policy to control inflation
1. restrictive policy and sell bonds
2. increase the reserve rate and ovenight rate

resulting in
1. excess reserves falling
2. money supply would fall
3. interest rates would rise
4. business investment would decline
5. aggregate demand will fall
6. the inflation rate will decline

Lowering interest rates stimulates the economy