Financial Risk Management Flashcards
What are some key tools to manage credit risk?
- Setting credit limits 2. Regular monitoring 3. Guarantees 4. Credit insurance
What is the purpose of setting credit limits?
Credit limits help manage credit risk by defining the maximum amount of credit extended to different customers based on predefined criteria.
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How does data analytics help in setting credit limits?
Data analytics tools enable predictive analysis of a customer’s risk profile, including business performance, financial ratios, credit rating, and debt burden, to set appropriate credit limits.
What is the role of regular monitoring in managing credit risk?
Regular monitoring involves tracking changes in a customer’s risk profile and adjusting credit limits, requesting additional securities, or discontinuing business with high-risk customers.
What is a guarantee in the context of credit risk management?
A guarantee is a risk-sharing strategy where a third party, usually a bank, provides assurance of repayment in case the borrower defaults on the credit.
How does credit insurance help manage credit risk?
Credit insurance shifts the risk to an insurer. The company offering credit pays a premium to the insurer, who then covers potential losses from customer defaults.
What is liquidity risk?
Liquidity risk is the risk of being unable to meet short-term financial obligations due to insufficient liquid assets or cash flow.
What is the purpose of standing credit lines?
Standing credit lines and overdraft facilities are used to manage liquidity risk by ensuring that companies have access to funds when needed to meet short-term obligations.
Why is regular monitoring of working capital ratios important?
Regular monitoring of working capital ratios helps companies identify and address issues such as unnecessary inventory, delayed debt recovery, and the impact of new customers on working capital, enabling timely corrective actions.
