Building blocks of RSK MNGMNT Flashcards
Which one of the following statements best describes the concept of risk in finance?
A. Any factor that may lead to the timing and amount of cash flows generated by a
business to differ from the estimated figures, including the possibility of financial loss
B. The possibility of making a financial loss in the future
C. The possibility of something bad happening
D. The probability of loss
The correct answer is: A)
What is Financial risk
Financial risk entails all the factors that may impact the cash flows/return of a project either
positively or negatively. However, the term ‘risk’ in finance often refers to downside risk i.e. the
probability of earning a lower-than-expected return or making a loss.
Which of the following is NOT a type of market risk?
A. Interest rate risk
B. Foreign exchange risk
C. Equity price risk
D. Liquidity risk
The correct answer is: D)
What is Market Risk
Market risk is the possibility of loss resulting from market movements example interest rate risk, foreign exchange risk, Equity price risk
What is liquidity risk
liquidity risk is
the risk that a financial instrument cannot be traded quickly enough to avoid a loss (or take
advantage of a price increase and make a profit).
After the United Kingdom voted to leave the European Union in 2016, the British pound
weakened against other currencies like the U.S dollar and the Chinese Yuan. Which one of the
following risks best explains this observation
A. Interest rate risk
B. Foreign exchange risk
C. Reputation risk
D. Equity risk
The correct answer is: B)
What is Foreign exchange risk with example
Foreign exchange risk is the risk that the foreign exchange rate will change, which in turn
affects the value of a financial instrument or asset held in that currency. In the aftermath of
‘‘Brexit,’’ investors were generally pessimistic about the economic stability of the U.K, for
instance, because of the anticipated shattering of decades-old trade deals between the U.K and
other European countries, coupled with the uncertainty associated with renegotiating new
bilateral links with individual countries. This loss of confidence led to the weakening of the
pound.
Which of the following is not an example of operational risk?
A. Inadequate/malfunctioning computer systems
B. Circumvention of issued regulations and guidelines
C. Occurrence of a natural disaster, such as a tornado
D. An increase in the price of gas
The correct answer is: D)
Definition of Operational risk with examples refers to the possibility of incurring losses resulting from operational
breakdowns, caused by either internal or external factors.
Operational risk refers to the possibility of incurring losses resulting from operational
breakdowns, caused by either internal or external factors.
Example
A.Inadequate/malfunctioning computer systems
B. Circumvention of issued regulations and guidelines
C. Occurrence of a natural disaster, such as a tornado
Which of the following best describes enterprise-wide risk manag
A. Applying risk management within individual departments on a piecemeal basis
B. Risk management that includes all major departments in a company
C. A structured and consistent set of principles or risk management that are applied
across the whole of a company
D. Risk management that encompasses all business units
The correct answer is: C)
What does Enterprise-wide risk management involve
Enterprise-wide risk management involves the development of structured and consistent
business principles that govern the way different business units of a company do business, in
regard to risk. By applying consistent risk management principles across the whole of a
company, all risks, including inter-departmental risks, are taken into account. ERM differs from
the silo-approach, in which different departments are left to manage risks on their own.
Which of the following is the correct definition of risk management in the context of financial
markets?
A. The practice of creating economic value by identifying and investing in risky projects
that could earn a profit
B. The practice of avoiding an extremely risky financial undertaking to prevent a loss
C. The practice of creating economic value by identifying and measuring risks, and
formulating robust plans to address and manage these risks
D. Setting risk limits beyond which an entity should not operate
The correct answer is: C)
What does risk managment do or entails
Risk management entails creating economic value by qualitatively and quantitatively identifying
and measuring all major risks associated with a business. It goes further to suggest ways of
addressing these risks. It differs from risk-taking, which only entails investing in risky but
profitable financial ventures.
Tohonday, a motor vehicle production company, has historically channeled most of its
earnings and spare cash into short-term government bonds maturing in less than a year. The
board wishes to change its investment policy substantially and intends to tap the riskier but
more profitable long-term bond market. Assuming you’re the risk manager for the company,
which of the following risks would be of utmost (immediate) concern from an operational point of
view?
A. Trading liquidity risk
B. Funding liquidity risk
C. Interest rate risk
D. Market risk
The correct answer is: B)
funding liquidity risk is
it’s
the inability to meet short-term financial obligations that often leads to bankruptcy
Distinguish between expected loss and unexpected loss.
A. Expected loss is the average credit loss we expect from an exposure while unexpected
loss is the loss that occurs over and above the expected loss.
B. Unexpected loss is the average credit loss we expect from an exposure while expected
loss is the loss that occurs over and above the unexpected loss.
C. Expected loss is the average credit loss that we would expect from an exposure while
unexpected loss is the loss that would occur without a quantitative expression.
D. Expected loss is the average credit loss that we would expect from an exposure while
unexpected loss is the sum of expected losses from several time periods
The correct answer is: A)
Define expected loss and unexpected loss
In statistical terminology, expected loss is simply the average loss that we would expect from a
given exposure over a period of time. Unexpected loss is the amount of loss that actually exceeds
the expected amount.
Which of the following statements best explains the relationship between risk and reward?
A. As the risk increases, the reward decreases.
B. As the risk decreases, the reward increases.
C. As the risk increases, the potential for reward increases.
D. The relation between risk and reward depends on the financial product.
The correct answer is: C)
Which of the following risks does not fall under the larger category of credit risk?
A. Settlement risk
B. Downgrade risk
C. Upward risk
D. Default risk
The correct answer is: C)
