Chapter 4 Flashcards
(14 cards)
Hedging strategies eliminate all financial risks for a company.
False
(Hedging reduces risk but doesn’t eliminate it entirely.)
Scenario analysis evaluates investment performance under varying hypothetical conditions.
True
The cash conversion cycle is irrelevant in managing liquidity risk.
False
(It’s critical for understanding liquidity needs.)
Operational risk arises solely from external factors like market conditions.
False
(It can also arise from internal factors like faulty processes or systems.)
Options contracts require the buyer to execute the contract at maturity.
False
(Options provide the right, not the obligation, to execute.)
Market risk includes the risk of changes in exchange rates and interest rates.
True
Value at Risk (VaR) measures the maximum potential loss at a certain confidence level.
True
Forward contracts provide the buyer with the option, but not the obligation, to execute the contract.
False
(That’s an option contract, not a forward contract.)
Diversification is a key strategy in integrated risk management.
True
Currency swaps are used to hedge against interest rate risk.
False
(They are used to hedge against exchange rate risk.)
Sensitivity analysis changes multiple variables simultaneously to evaluate their impact on outcomes.
False
(Sensitivity analysis changes one variable at a time; scenario analysis changes multiple variables.)
A firm with a positive cash conversion cycle will typically require external financing for short-term operations.
True
Forward contracts are standardized instruments traded on financial exchanges.
False
(Forward contracts are customized agreements and not traded on exchanges.)
Integrated risk management ensures that financial, operational, and market risks are assessed collectively.
True
