Financial Risk Management

Question 1

Interest rate goes up

Answer 1

Value of investment goes down

Question 2

Diversifiable risk

Answer 2

Spread the risk

Question 3

Market Risk

Answer 3

• Price Risk

Question 4

Liquidity Risk

Answer 4

• Reducing private equity

Question 5

Default Risk

Answer 5

Assess their risk of default

Question 6

Ratios

Answer 6

Credit worthiness - Credit Risk Credit companies look at improve ratios to improve credit ratings

Question 7

Derivative

Answer 7

A financial contract which derives its value from the performance of another asset or financial contract

Question 8

DUNS

Answer 8

Diversifiable
Unsystematic
Nondiversifiable
Systematic

Question 9

PUT option

Answer 9

sell a specific security at fixed conditions of price and time

Question 10

Exchange Rate Risks

Answer 10

Exists because the relationship between domestic and foreign currencies may be subject to volatility

Question 11

Exchange Rate Risks

Answer 11

Exists because the relationship between domestic and foreign currencies may be subject to volatility

Question 12

Exchange Rate Factors

Answer 12

Trade and Financial

Question 13

Trade Factor

Answer 13

Relative Inflation Rates
Purchasing Power
Relative income levels
Government Controls

Question 14

Inflation up

Answer 14

Demand for currency goes down along with value

Question 15

Inflation

Answer 15

Loss of purchasing power

Question 16

Financial Factors

Answer 16

Pay high interest rates, demand and value goes up

Question 17

US values goes down

Answer 17

FC goes up, alot of receivables in FC
PV goes up
US goods are cheap now thus exports
Exports are up because it’s now cheaper

Question 18

US value goes up

Answer 18

FC goes down Domestic good more expensive thus exports

Question 19

Translation Exposure

Answer 19

The more foreign subs, the greater the risk

Question 20

Translation Exposure

Answer 20

The more foreign subs, the greater the risk

Question 21

Selective Hedging

Answer 21

Forward, futures, options, swaps

Question 22

FC goes up

Answer 22

Liabilities goes up, need to hedge

Identify the risk

Question 23

AR>AP =

Answer 23

Net Asset/Net Export

Question 24

AP>AR=

Answer 24

Net liability/ Import

Question 25

Future Hedges

Answer 25

Smaller transaction

Standard amounts

Question 26

Net liability

Answer 26

Imports are greater than exports = loss

Question 27

Net liability

Answer 27

Imports are greater than exports = loss

Question 28

AP Application

Answer 28

Buy call options

Buy futures contracts

Question 29

If they dont hedge

Answer 29

Company incurs a foreign exchange loss

Question 30

AR Application

Answer 30

Buy PUT options
Sell Future Contracts
Use profit to offset loss if FC goes down
Sell when you think it is going to go down, offset lower value of asset

Question 31

Mitigrating Transaction Exposes (Option Hedges)

Answer 31

Buy call - cap on cost

But put - floor on rev

Question 32

If foreign currency goes up

Answer 32

Buy call options on the foreign currency, use the profit to offset the higher accounts payable