Financial Risk Management, 2026 – Study Material and Practice
Questions
Risk Management Components - correct answer ✔✔ (1) Objective Setting: policy & strategy;
risk appetite; direction, balance, control & approval (2) Internal Environment, (3) Organization:
allocation of roles & responsibilities, (4) Event Identification, (5) Risk Assessment: survey or RIM
or scenario analysis
Counterparty Default Risk - correct answer ✔✔ (1)Receive payment first, (2) Credit scores and
analysis, (3) Replace risk: Guarantor, Letter of Credit, Credit Insurance (accounts receivable
insurance, CDS), (4) Collateral, (5) Netting Agreement, (6) Covenants, (7) Price according to risk,
(8) Sell loans without recourse
Default Risk - correct answer ✔✔ (1) Counterparty: Individual, Corporation and Government, (2)
Issuer Risk, (3) Issue Default Risk and (4) Sovereign Risk
Downgrade Risk - correct answer ✔✔ Borrowing costs increase, more difficult to do
transactions, price of bonds will change, investors may not be able to hold
Credit Spread Risk - correct answer ✔✔ Risk that yields of same duration will more in different
directions.
Measurement of Credit Risk - correct answer ✔✔ (1) Basic Methodology: notional amounts, (2)
Simple methodology: notional amounts * general risk-weights & (3) Advanced Method = Prob of
default*Notional amnt* (1-recovery rate)
Foreign Exchange Risk - correct answer ✔✔ (1) Transaction Exposure, (2) Translation Exposure
and (3) Economic Exposure
Measuring FOREX Transaction Risk - correct answer ✔✔ Nominal amount * Daily Volatility
, Measuring FOREX Economic Risk - correct answer ✔✔ Value at Risk (VaR) - developed by JP
Morgan in 1994. Only x% probability that the company will suffer a value decline greater than y
in n days.
VaR Methods - correct answer ✔✔ (1) Historical: % change per day, sort highest to lowest; (2)
Variance - Covariance: never used in real life, assumes normal distribution, cumbersome and (3)
VaR Monte Carlo Simulation
Options for FOREX risk management - correct answer ✔✔ (1) Retain [do nothing], (2) Hedge or
(3) Increase
Costs of Hedging - correct answer ✔✔ Implicit (potential profit lost, incurred side costs) and
Explicit (premium)
Benefits to Hedge - correct answer ✔✔ Reduce distress liklihood, volatility reduced, predictable
CFs, hedge against extraneous/ unrelated risks and make risk adverse managers/firms more
willing
Internal Hedging Techniques - correct answer ✔✔ Matching (imports/exports), netting,
leading/lagging or intercompany payment discipline (manage collectively)
Lending and Borrowing - correct answer ✔✔ (1) Close FX position in the spot market, (2) Lend
currency until needed, (3) Borrow sold currency until same day. *Difference between interest
earned and borrowing interest*
Forward Rate - correct answer ✔✔ Spot (1 + i/t) / 1 (1 + ir/t)
Futures vs. Forwards - correct answer ✔✔ Exchange houses, standardized contracts and margin
requirements
Questions
Risk Management Components - correct answer ✔✔ (1) Objective Setting: policy & strategy;
risk appetite; direction, balance, control & approval (2) Internal Environment, (3) Organization:
allocation of roles & responsibilities, (4) Event Identification, (5) Risk Assessment: survey or RIM
or scenario analysis
Counterparty Default Risk - correct answer ✔✔ (1)Receive payment first, (2) Credit scores and
analysis, (3) Replace risk: Guarantor, Letter of Credit, Credit Insurance (accounts receivable
insurance, CDS), (4) Collateral, (5) Netting Agreement, (6) Covenants, (7) Price according to risk,
(8) Sell loans without recourse
Default Risk - correct answer ✔✔ (1) Counterparty: Individual, Corporation and Government, (2)
Issuer Risk, (3) Issue Default Risk and (4) Sovereign Risk
Downgrade Risk - correct answer ✔✔ Borrowing costs increase, more difficult to do
transactions, price of bonds will change, investors may not be able to hold
Credit Spread Risk - correct answer ✔✔ Risk that yields of same duration will more in different
directions.
Measurement of Credit Risk - correct answer ✔✔ (1) Basic Methodology: notional amounts, (2)
Simple methodology: notional amounts * general risk-weights & (3) Advanced Method = Prob of
default*Notional amnt* (1-recovery rate)
Foreign Exchange Risk - correct answer ✔✔ (1) Transaction Exposure, (2) Translation Exposure
and (3) Economic Exposure
Measuring FOREX Transaction Risk - correct answer ✔✔ Nominal amount * Daily Volatility
, Measuring FOREX Economic Risk - correct answer ✔✔ Value at Risk (VaR) - developed by JP
Morgan in 1994. Only x% probability that the company will suffer a value decline greater than y
in n days.
VaR Methods - correct answer ✔✔ (1) Historical: % change per day, sort highest to lowest; (2)
Variance - Covariance: never used in real life, assumes normal distribution, cumbersome and (3)
VaR Monte Carlo Simulation
Options for FOREX risk management - correct answer ✔✔ (1) Retain [do nothing], (2) Hedge or
(3) Increase
Costs of Hedging - correct answer ✔✔ Implicit (potential profit lost, incurred side costs) and
Explicit (premium)
Benefits to Hedge - correct answer ✔✔ Reduce distress liklihood, volatility reduced, predictable
CFs, hedge against extraneous/ unrelated risks and make risk adverse managers/firms more
willing
Internal Hedging Techniques - correct answer ✔✔ Matching (imports/exports), netting,
leading/lagging or intercompany payment discipline (manage collectively)
Lending and Borrowing - correct answer ✔✔ (1) Close FX position in the spot market, (2) Lend
currency until needed, (3) Borrow sold currency until same day. *Difference between interest
earned and borrowing interest*
Forward Rate - correct answer ✔✔ Spot (1 + i/t) / 1 (1 + ir/t)
Futures vs. Forwards - correct answer ✔✔ Exchange houses, standardized contracts and margin
requirements
