Module 1 Flashcards

1
Q

What is value creation

A

benefits exceed costs

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2
Q

What is value preservation

A

sustained created benefits. ex) high customer satisfaction with profitable product

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3
Q

what is value erosion

A

value declines ex) unsuccessful launch of a new product

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4
Q

what is value realization

A

benefits received by stakeholders in monetary or nonmonetary form ex) increased profitability and stock prices

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5
Q

Where is core values in ERM

A

Govt and Culture

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6
Q

where is mission and vision in ERM

A

Strategy and Objective Setting

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7
Q

where is risk responses in ERM

A

Performance

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8
Q

Risk Response: Accept

A

No action taken to adjust severity of risk

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9
Q

Risk Response: Avoid

A

Remove the risk (i.e. leaving a line of business)

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10
Q

Risk Response: Pursue

A

Action taken to accept increased risk to achieve improved performance

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11
Q

Risk Response: Reduce

A

mgmt designs risk mitigating techniques to reduce risk

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12
Q

Risk Response: Share

A

reduce risk by outsourcing and getting insurance

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13
Q

Some process documents in revenue process

A

pick ticket, packaging slip, bill of lading, remittance advice

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14
Q

Some process documents in expenditure process

A

purchase order, receiving report, voucher (3 way check), also purchase requisition, and supplier invoice

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15
Q

5 steps of manufacturing process

A
  1. product design and engineering, 2. product development, 3. Manufacturing forecasting and scheduling, 4. Manufacturing operations, 5. manufacturing and fixed asset accounting and reporting
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16
Q

Some manufacturing process documents

A

bill of materials, production instructions, production schedule, production order

17
Q

What are data flow diagrams

A

logical flow of data through a process, use very little documentation symbols, and start with context diagrams.

18
Q

What are flow charts

A

Visual representation of a process. Identifies risk and potential control deficiencies.

19
Q

What is system interface diagram

A

demonstrate how user and functions, both internally and externally, interface with organization systems. Diagrams logical relationships

20
Q

Interest rate risk

A

fluctuations in the value of an instrument. Mitigate: floating rate debt securities, forward rate agreements, and interest rate swaps

21
Q

Market/Systematic/Undiversifiable Risk

A

risk inherent to the economy. mitigate: derivatives and short selling.

22
Q

Unsystematic/Diversifiable/Firm-Speciflc Risk

A

eliminated through diversification

23
Q

Credit Risk

A

affects borrowers, inability to secure financing. Mitigate: Improvement in credit rating

24
Q

Default Risk

A

affects lenders, debtors may not pay back principle and interest. Mitigate: lend to borrowers with low risk of default or adjust rates based on risk of borrower.

25
Liquidity Risk
desire to sell security but cannot in a timely manner. mitigate: allow greater percentage of capital to investments in active markets.
26
Price Risk
decline in the value of individual securities or portfolio. Mitigate: short selling or derivatives such as put options
27
Required rate of return
Risk free rate plus risk premiums (maturity risk premium, purchasing power/inflation premium, liquidity risk premium, and default risk premium)
28
Freely fluctuating exchange rates perform what function
automatically correct the lack of equilibrium in the balance of payments
29
what is transaction exposure
potential for economic gain or loss with the settlement of individual transactions due to changes in exchange rates.
30
what is economic exposure
potential of present value of org's cash flow increase or decrease due to changes in exchange rates.
31
what is translation exposure
risk that assets, liabilities, equity, or income of foreign subsidiary will change as a result of exchange rates.
32
How to hedge accounts payable
future hedge/forward hedge contract to buy foreign currency at a specific price and time period. exercise a call option to buy, if option price is more than exchange rate, let option expire.
33
How to hedge accounts receivables
future hedge/forward hedge contract to sell foreign currency at a specific price and time period. exercise a put option to sell, if option price is less than exchange rate, let it expire.
34
How to mitigate transaction exposure for LT transactions
1. Long term forward contracts 2. Currency Swaps (2 firms, financial intermediaries, parallel loan)
35
Mitigating economic and translation exposure
mitigate through organization wide solutions such as restructuring and adjustments to business plan.