Financial Risk Management Flashcards
7 cards from real ARM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Financial Risk Management flashcards as text
Which of the following best defines financial risk in the context of risk management?
Answer: The potential for loss due to adverse movements in financial markets or counterparty failure
Financial risk encompasses the potential for loss arising from changes in financial market variables or the failure of counterparties to meet obligations.
Interest rate risk primarily affects an organization by:
Answer: Changing the market value of fixed-income assets and the cost of variable-rate debt
When interest rates change, the present value of fixed-income instruments and the carrying cost of floating-rate liabilities change, directly affecting an organization's financial position.
Credit risk is most accurately described as:
Answer: The risk that a borrower or counterparty will fail to meet its contractual financial obligations
Credit risk is the potential for loss when a debtor or counterparty defaults on or fails to honor its financial commitments.
Foreign exchange (currency) risk arises when:
Answer: An organization has assets, liabilities, revenues, or costs denominated in a foreign currency
Currency risk occurs when an entity is exposed to adverse fluctuations in exchange rates because it transacts or holds positions in a currency other than its functional currency.
Liquidity risk in financial risk management refers to:
Answer: The risk that an organization cannot easily buy or sell an asset without significantly affecting its price, or cannot meet short-term obligations
Liquidity risk encompasses both the inability to convert assets to cash at fair value (market liquidity risk) and the inability to fund obligations when due (funding liquidity risk).
Market risk is best characterized as:
Answer: The risk of loss from adverse changes in market prices, including equities, commodities, interest rates, and foreign exchange
Market risk (also called systematic risk) is the broad risk of losses from unfavorable movements in any traded market variable, not just equities.
An interest rate swap is most commonly used to:
Answer: Convert a floating-rate debt obligation to a fixed rate (or vice versa) to manage interest rate risk
An interest rate swap allows two parties to exchange fixed and floating interest payment streams, enabling borrowers or investors to align their interest rate exposure with their risk tolerance.