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Flashcards in Financial Risk Management Deck (31):
1

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

2

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

3

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

4

What is the process of selecting investments of different risks?

Diversification

5

Can all risks be managed through diversification?

No

6

What are other names for nondiversifiable risk?

Market or systematic

7

What type of risk is the value as a result of operating within an economy?

Market risk

8

What type of risk is when debtor may not repay the principal or interest due?

Default risk

9

What compensates investors & creditors for assumed risk?

Return

10

What is the rate of interest charged before any adjustment for compounding and shown in the agreement?

Stated interest rate

11

Computation for Effective interest rate

Interest paid / net proceeds

12

Computation for Annual Percentage Rate

Effective periodic interest rate x number of periods in year or annual interest paid / net proceeds

13

Computation of Effective Annual Percentage Rate Calculation

(1+(Interest / compounding periods per year))^p-1

14

Simple Interest Computation

Principal x Interest rate x number of periods

15

Compound Interest Calculation

Principal x (1+rate)^number of years

16

What are the risk factors?

Trade & financial

17

What are the risk exposure categories?

Transaction, economic, and translation

18

What are the trade related factors?

Relative inflation rates, relative income levels, and government controls

19

What are the financial factors?

Relative interest rates & capital flow

20

What is the process of measuring specific Net Transaction Exposure?

Selective hedging, identifying net transaction exposure, and adjusting invoice policies

21

What does hedging do?

Reduces risk

22

What type of hedge is denominated in standard amounts and tend to be used for smaller transactions?

Future hedges

23

What is transfer pricing used for?

Minimization of local taxation

24

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

25

What type of exposure is defined as the potential that the present value of an organization's cash flows could increase or decrease as a result of changes in the exchange rates?

Economic Exposure

26

What type of exposure is defined as the risk that assets, liabilities, equity, or income of a consolidated organization that includes foreign subsidiaries will change as a result of changes in exchange rates?

Translation Exposure

27

What are the steps to transaction exposure?

Project foreign currency net inflows/outflows
Estimate the variability associated with the foreign currency

28

What COBIT domain consist of providing direction to solution and service delivery?

Plan and Organize

29

What type of COBIT domain consist of providing solutions for IT needs?

Acquire and Implement

30

What type of COBIT domain consist of providing IT services to users?

Deliver and Support

31

What type of COBIT domain consist of ensuring that the direction provided in the planning and organizing steps are followed?

Monitor and Evaluate