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Flashcards in Risk Management Deck (17):

The risk that a sluggish economy will affect the value of a debt instrument

Risk Management


The risk that an event in the investment's business sector will harm the investment

For example- the banking sector is sluggish- so even stocks of healthy banks suffer

Risk Management


The risk that a debtor will be unable to make loan payments or pay back the principal

Risk Management


The risk that a change in interest rates will adversely affect the value of the note

Example: Bond is for 10% but prevailing market rate is now 12%. If bondholder wants to sell it- they will have to sell it at a discount.

Risk Management


It measures the volatility of an investment.

Risk Management


Risk that impacts the entire market and can't be avoided or reduced through diversification

Example: Wars

Risk Management


Relates to a particular industry or company

Example: You own stocks in ethanol plants and an untimely freeze kills all of the corn in the Midwest

Risk Management


Beta measures how volatile the investment is relative to the rest of the market.

In other words- how quickly (and in what amount) does the value of the stock change when the market sways?

Risk Management


It compares volatility of an investment to the market average.

Factors include both Systematic and Unsystematic Risk.

Risk Management


An asset whose value is DERIVED from the value of another asset.

Derivatives are measured at Fair Value.

Risk Management


Gives the buyer the option to buy or sell a financial derivative at a certain price

Traders use them to speculate where they think the price will be at a certain point and make a profit

Hedgers use them to offset risk

Risk Management


A Forward Contract with a future value.

They are sold and traded on the futures market.

Risk Management


Forward Contract to swap payment agreements

They are highly liquid and often valued using the Zero-Coupon method.

Example: Steve pays Sally a fixed payment with a fixed interest rate. Sally pays Steve a variable payment tied to a benchmark such as LIBOR

Risk Management


Risk that a law or regulation will void the derivative

Risk Management


Hedge that protects against the value of an asset or liability changing.

Changes in value are reported in earnings.

Risk Management


A hedge that protects against a set of future cash flows changing.

Changes in value are reported in OCI.

Risk Management


A hedge that protects against the value of a foreign currency changing.

For example- a foreign currency hedge might be used to protect against the following: If you have receivables denominated in a foreign currency and that currency dips in value - your receivables are worth less than before.

Risk Management