Risk and Its Management Intro Actuarial Science (correct answers)
Risk correct answers used to describe a situation where there is uncertainty about what
outcome will occur
can describe the expected losses associated with a situation
can describe the variability around the expected value
Two Meanings of Risk correct answers One situation is riskier than another if it has
greater:
1. Expected Loss
2. Uncertainty (variability around the expected loss)
Indirect Losses correct answers arise as a consequence of direct losses
extremely important for businesses, one of the main reasons that businesses try to
reduce risk
Types of Indirect Losses correct answers 1. Loss of normal profit (net cash flow)
2. Extra operating expenses
3. Higher cost of funds and foregone investment
4. Bankruptcy costs (legal fees)
Indirect losses that can arise from the risks faced by businesses: correct answers 1.
damage to productive assets can produce and indirect loss by reducing or eliminating
the normal profit (net cash flow) that the asset would have generated if the damage had
not occurred
2. large direct losses can also lead to indirect losses if they threaten the viability of the
business and thereby reduce the willingness of customers and suppliers to deal with the
business or change terms (prices) at which they transact
3. if sales or production are reduced in response to direct losses, certain types of
normal operating expenses (continuing expenses) may not decline in proportion to the
reduction in revenues, thus increasing indirect losses
4. if a long interruption in production would cause many customers to switch suppliers,
or if a firm has binding contractual commitments to supply products, it may also be
desirable for the firm to increase operating costs above normal levels following direct
losses. The increased operating cost would create an indirect loss- FIX PG 3
5. The possibility that the business will face a higher cost of obtaining funds from
lenders or from new equity issues following large direct loss.
, business risk management correct answers concered with possible reductions in
business value from any source
business value to shareholders correct answers is relfected in the value of the firm's
common stock and depends fundamentally on the expected size, timing and risk
(variability) associated with the firm's future net cash flows (cash inflows less cash
outflows
major business risks that give rise to variation in cash flows and business value correct
answers price risk, credit risk and pure risk
Major types of business risk correct answers Price Risk- (Output price Risk and Input
Price Risk)
1. Commodity Price Risk
2. Exchange Rate Risk
3. Interest Rate Risk
Credit Risk
Pure Risk
1. Damage to assets
2. Legal Liability
3. Worker Injury
4. Employee Benefits
Price risk correct answers uncertainty over the magnitude of cash flows due to possible
changes in output and input prices
Output Price Risk correct answers the risk of changes int he prices that a firm can
demand for its goods and services
Input Price RIsk correct answers the risk of changes in the prices that a firm must pay
for labor, materials, and other inputs to its production process
Three types of price risk correct answers commodity price risk
exchange rate risk
interest rate risk
Commodity Price Risk correct answers fluctuations in the prices of commodities such as
coal, copper, oil, gas, and electricity, that are inputs for some firms and outputs for
others
Exchange Rate Risk correct answers given the globalization of economic activity output
and input prices for may firms are also affected by fluctuations in foreign exchange rates
Risk correct answers used to describe a situation where there is uncertainty about what
outcome will occur
can describe the expected losses associated with a situation
can describe the variability around the expected value
Two Meanings of Risk correct answers One situation is riskier than another if it has
greater:
1. Expected Loss
2. Uncertainty (variability around the expected loss)
Indirect Losses correct answers arise as a consequence of direct losses
extremely important for businesses, one of the main reasons that businesses try to
reduce risk
Types of Indirect Losses correct answers 1. Loss of normal profit (net cash flow)
2. Extra operating expenses
3. Higher cost of funds and foregone investment
4. Bankruptcy costs (legal fees)
Indirect losses that can arise from the risks faced by businesses: correct answers 1.
damage to productive assets can produce and indirect loss by reducing or eliminating
the normal profit (net cash flow) that the asset would have generated if the damage had
not occurred
2. large direct losses can also lead to indirect losses if they threaten the viability of the
business and thereby reduce the willingness of customers and suppliers to deal with the
business or change terms (prices) at which they transact
3. if sales or production are reduced in response to direct losses, certain types of
normal operating expenses (continuing expenses) may not decline in proportion to the
reduction in revenues, thus increasing indirect losses
4. if a long interruption in production would cause many customers to switch suppliers,
or if a firm has binding contractual commitments to supply products, it may also be
desirable for the firm to increase operating costs above normal levels following direct
losses. The increased operating cost would create an indirect loss- FIX PG 3
5. The possibility that the business will face a higher cost of obtaining funds from
lenders or from new equity issues following large direct loss.
, business risk management correct answers concered with possible reductions in
business value from any source
business value to shareholders correct answers is relfected in the value of the firm's
common stock and depends fundamentally on the expected size, timing and risk
(variability) associated with the firm's future net cash flows (cash inflows less cash
outflows
major business risks that give rise to variation in cash flows and business value correct
answers price risk, credit risk and pure risk
Major types of business risk correct answers Price Risk- (Output price Risk and Input
Price Risk)
1. Commodity Price Risk
2. Exchange Rate Risk
3. Interest Rate Risk
Credit Risk
Pure Risk
1. Damage to assets
2. Legal Liability
3. Worker Injury
4. Employee Benefits
Price risk correct answers uncertainty over the magnitude of cash flows due to possible
changes in output and input prices
Output Price Risk correct answers the risk of changes int he prices that a firm can
demand for its goods and services
Input Price RIsk correct answers the risk of changes in the prices that a firm must pay
for labor, materials, and other inputs to its production process
Three types of price risk correct answers commodity price risk
exchange rate risk
interest rate risk
Commodity Price Risk correct answers fluctuations in the prices of commodities such as
coal, copper, oil, gas, and electricity, that are inputs for some firms and outputs for
others
Exchange Rate Risk correct answers given the globalization of economic activity output
and input prices for may firms are also affected by fluctuations in foreign exchange rates
