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