Financial Risk Management Flashcards
(31 cards)
What type of behavior is an increase in the level of risk that does not result in an increase in management’s required rate of return?
Risk indifferent behavior
What type of behavior is an increase in the level of risk that results in an increase in management’s required rate of return?
Risk-averse behavior
What type of behavior is the increase in the level of risk that results in a decrease in management’s required rate of return?
Risk-seeking behavior
What is the process of selecting investments of different risks?
Diversification
Can all risks be managed through diversification?
No
What are other names for nondiversifiable risk?
Market or systematic
What type of risk is the value as a result of operating within an economy?
Market risk
What type of risk is when debtor may not repay the principal or interest due?
Default risk
What compensates investors & creditors for assumed risk?
Return
What is the rate of interest charged before any adjustment for compounding and shown in the agreement?
Stated interest rate
Computation for Effective interest rate
Interest paid / net proceeds
Computation for Annual Percentage Rate
Effective periodic interest rate x number of periods in year or annual interest paid / net proceeds
Computation of Effective Annual Percentage Rate Calculation
(1+(Interest / compounding periods per year))^p-1
Simple Interest Computation
Principal x Interest rate x number of periods
Compound Interest Calculation
Principal x (1+rate)^number of years
What are the risk factors?
Trade & financial
What are the risk exposure categories?
Transaction, economic, and translation
What are the trade related factors?
Relative inflation rates, relative income levels, and government controls
What are the financial factors?
Relative interest rates & capital flow
What is the process of measuring specific Net Transaction Exposure?
Selective hedging, identifying net transaction exposure, and adjusting invoice policies
What does hedging do?
Reduces risk
What type of hedge is denominated in standard amounts and tend to be used for smaller transactions?
Future hedges
What is transfer pricing used for?
Minimization of local taxation
What type of exposure is defined as the potential that an organization could suffer economic loss or experience economic gain upon settlement of individual transactions as a result of changes in the exchange rates?
Transaction Exposure
