ARM 401-9 FINANCIAL RISK UPDATED ACTUAL Questions and CORRECT
Answers
1. financial risks speculative risks associated with the
effects of market forces on financial
assets and/or liabilities
2. Three types of financial risks 1. market
2. credit
3. price
3. market risk uncertainty about an investments fu-
ture value due to changes in the mar-
ket for that type of investment
both positive and negative potential
three types
a. interest rate risk
b. exchange rate risk
c. liquidity risk
4. Interest rate risk uncertainty over changes in interest
rates and the effect of those changes
on a securities future value
ex. a firm invests $1m in a 10 yr gvmt
bond that pays 3% interest annually.
next year, if newly issued bonds pay
3.5%, the MV of these bonds will drop.
If newly issued bonds pay 2.5%, the
MV of these bonds will inc.
5. Exchange rate risk the risk that changes in exchange rate
will affect the value of a firm's assets
and liabilities
, ex. if the USD depreciates against the
euro, one dollar buys fewer euros. A
US buyer who is making installment
payment s in euros will need to pay
more dollars to make the stated pay-
ments in Euros
6. Liquidity risk represents uncertainty about the abil-
ity to convert an investment to cash
quickly with little loss of principle
(w/in a short time pd and a small
price range)
7. Credit Risk the change that a debtor will not pay
his obligations as they come due.
credit risk has ONLY negative potential
8. Price Risk unanticipated change in the cost of
inputs or prices of products
both positive and negative potential
two aspects:
a. output
b. input
9. Output price risk the price charged for the firm's prod-
ucts or services
10. Input price risk the price of resources used to make
the firm's products
11. Balance sheet
Answers
1. financial risks speculative risks associated with the
effects of market forces on financial
assets and/or liabilities
2. Three types of financial risks 1. market
2. credit
3. price
3. market risk uncertainty about an investments fu-
ture value due to changes in the mar-
ket for that type of investment
both positive and negative potential
three types
a. interest rate risk
b. exchange rate risk
c. liquidity risk
4. Interest rate risk uncertainty over changes in interest
rates and the effect of those changes
on a securities future value
ex. a firm invests $1m in a 10 yr gvmt
bond that pays 3% interest annually.
next year, if newly issued bonds pay
3.5%, the MV of these bonds will drop.
If newly issued bonds pay 2.5%, the
MV of these bonds will inc.
5. Exchange rate risk the risk that changes in exchange rate
will affect the value of a firm's assets
and liabilities
, ex. if the USD depreciates against the
euro, one dollar buys fewer euros. A
US buyer who is making installment
payment s in euros will need to pay
more dollars to make the stated pay-
ments in Euros
6. Liquidity risk represents uncertainty about the abil-
ity to convert an investment to cash
quickly with little loss of principle
(w/in a short time pd and a small
price range)
7. Credit Risk the change that a debtor will not pay
his obligations as they come due.
credit risk has ONLY negative potential
8. Price Risk unanticipated change in the cost of
inputs or prices of products
both positive and negative potential
two aspects:
a. output
b. input
9. Output price risk the price charged for the firm's prod-
ucts or services
10. Input price risk the price of resources used to make
the firm's products
11. Balance sheet
