Risk Management in Finance

Question 1

What is market risk?

Answer 1

The risk of losses due to changes in market prices, affecting assets like stocks, bonds, and commodities.

Question 2

What are the types of market risk?

Answer 2

Equity risk, interest rate risk, commodity risk, and currency risk.

Question 3

What is credit risk?

Answer 3

The risk that a borrower or counterparty will default on their financial obligations.

Question 4

What are the types of credit risk?

Answer 4

Default risk, counterparty risk, and concentration risk.

Question 5

What is liquidity risk?

Answer 5

The risk of being unable to buy or sell an asset quickly without affecting its price or failing to meet financial obligations.

Question 6

What are the types of liquidity risk?

Answer 6

Asset liquidity risk and funding liquidity risk.

Question 7

What is operational risk?

Answer 7

Risk of loss from failures in internal processes, people, systems, or external events.

Question 8

What is compliance risk?

Answer 8

Risk of financial loss due to non-compliance with laws, regulations, or internal policies.

Question 9

What is reputational risk?

Answer 9

Risk of losing reputation, which can reduce the ability to retain clients, attract new ones, or raise funds.

Question 10

What is diversification?

Answer 10

Spreading investments across asset classes, industries, or locations to reduce exposure to any single risk.

Question 11

What is hedging?

Answer 11

Using financial instruments to offset potential losses in investments.

Question 12

What is the purpose of insurance in risk management?

Answer 12

To transfer risk to an insurance company in exchange for premiums, protecting against unexpected losses.

Question 13

What is setting limits in risk management?

Answer 13

Establishing maximum exposure levels for investments to prevent overexposure to particular risks.

Question 14

What is risk avoidance?

Answer 14

Choosing not to engage in activities that carry potential risk.

Question 15

What is risk transfer?

Answer 15

Shifting risk to a third party, like using contracts or insurance.

Question 16

What is risk retention?

Answer 16

Accepting a risk instead of mitigating or transferring it, often because the mitigation cost is higher than the risk itself.

Question 17

What is Value at Risk (VaR)?

Answer 17

A measure estimating the maximum potential loss of an investment over a specified period at a certain confidence level.

Question 18

What is stress testing?

Answer 18

Evaluating the impact of extreme scenarios on a portfolio or business to assess financial resilience.

Question 19

What is sensitivity analysis?

Answer 19

Analyzing how changes in variables like interest rates affect a business’s or investment’s performance.

Question 20

What are credit scoring models?

Answer 20

Models used by lenders to assess a borrower’s creditworthiness based on financial history and other factors.

Question 21

What is the purpose of insurance policies in risk management?

Answer 21

To cover potential losses from events like accidents or disasters by transferring risk to the insurer.

Question 22

What are financial derivatives?

Answer 22

Instruments like options, futures, and swaps used to hedge against price, interest rate, or currency risks.

Question 23

What is risk identification?

Answer 23

The process of identifying potential risks that could impact an organization or portfolio.

Question 24

What is risk assessment?

Answer 24

Analyzing the likelihood and impact of identified risks to understand their significance.

Question 25

What is risk prioritization?

Answer 25

Ranking risks based on their impact and likelihood to focus on the most significant ones.

Question 26

What is risk mitigation or response planning?

Answer 26

Developing strategies to manage identified risks, including avoidance, transfer, mitigation, or acceptance.

Question 27

What is the purpose of monitoring and review in risk management?

Answer 27

To ensure risk management strategies remain effective and adjust to new risks.