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Financial Risk Management Flashcards

7 cards from real CTP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A company's Value at Risk (VaR) is $2 million at the 99% confidence level over a 1-day horizon. What does this mean?

    Answer: There is a 1% chance losses will exceed $2M in a single day

    VaR at 99% confidence means there is a 1% probability that losses will exceed the stated amount over the specified horizon.

  2. Which hedging instrument provides the most flexibility because it conveys the right but not the obligation to transact?

    Answer: Option

    Options grant the holder the right but not the obligation to buy or sell, providing flexibility that forward and futures contracts do not.

  3. Counterparty credit risk in derivatives is best mitigated by requiring the posting of:

    Answer: Collateral under a Credit Support Annex (CSA)

    A Credit Support Annex (CSA) attached to the ISDA Master Agreement requires counterparties to post collateral based on mark-to-market exposure.

  4. A company holds a portfolio of floating-rate liabilities and wants to convert them to fixed-rate obligations. Which instrument accomplishes this?

    Answer: Enter a pay-fixed, receive-floating interest rate swap

    In a pay-fixed, receive-floating swap, the company pays a fixed rate and receives floating, effectively converting its floating liability to a fixed obligation.

  5. Which of the following best describes basis risk in a hedging program?

    Answer: The risk that the hedge instrument does not perfectly offset changes in the hedged item's value

    Basis risk arises when the price movements of the hedging instrument and the hedged item are not perfectly correlated.

  6. Under FASB ASC 815, a cash flow hedge of a forecasted transaction requires the effective portion of the hedge's gain or loss to be reported in:

    Answer: Other Comprehensive Income (OCI) until the hedged transaction affects earnings

    For cash flow hedges, the effective portion of the hedging instrument's gain or loss is deferred in OCI and reclassified into earnings when the hedged item impacts income.

  7. A treasury manager is concerned about the company's exposure to a potential sharp decline in the value of a key foreign currency receivable. The most appropriate hedge would be to:

    Answer: Sell a forward contract on the foreign currency

    Selling a forward contract on the foreign currency locks in a future exchange rate, protecting against a decline in the currency's value on a receivable.