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.
Read the first 7 Financial Risk Management flashcards as text
A U.S. company has a EUR-denominated subsidiary. To hedge the translation exposure of the subsidiary's equity, it should:
Answer: Borrow in EUR to create a EUR liability that offsets the EUR-denominated equity
Issuing EUR-denominated debt creates a natural hedge: translation losses on the subsidiary's equity are offset by translation gains on the EUR liability.
The 'Greeks' in options pricing include Delta, Gamma, Theta, and Vega. A long call option position will experience time value decay as expiration approaches, which is reflected by:
Answer: A negative Theta
Theta represents time decay; a long option position has negative Theta because option value erodes as time passes, all else equal.
Enterprise Risk Management (ERM) differs from traditional siloed risk management primarily because ERM:
Answer: Considers all risks holistically across the organization and their interdependencies
ERM integrates all risk categories—financial, operational, strategic, and reputational—into a unified framework that considers how risks interact across the enterprise.
A commodity producer uses a collar strategy to hedge price risk. Which combination of instruments constitutes a zero-cost collar?
Answer: Buy a put and sell a call, with premiums that offset each other
A zero-cost collar involves buying a protective put and selling a call at a higher strike; the call premium received offsets the put premium paid.
Under the COSO ERM framework, 'risk appetite' is best defined as:
Answer: The amount of risk an organization is willing to accept in pursuit of its objectives
Risk appetite is the broad-based amount of risk a company accepts in pursuit of value, set by the board and guiding strategic decision-making.
Stress testing differs from VaR analysis because stress testing:
Answer: Examines the impact of severe but plausible scenarios rather than relying on historical distributions
Stress testing evaluates portfolio impact under specific extreme scenarios (e.g., 2008 financial crisis) and does not rely on historical return distributions as VaR does.
A company's natural hedge is most effective when:
Answer: Revenues and costs in the same foreign currency are roughly equal in size
A natural hedge occurs when foreign currency revenues and costs offset each other, reducing net currency exposure without requiring financial instruments.