Financial Risk Management Exam with all Correct &
100% Verified Answers |Already Graded A+
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)
100% Verified Answers |Already Graded A+
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)
