Risk Management Flashcards

Under the 2017 COSO ERM framework (Integrating with Strategy and Performance), how many components are there?

Answer: Five

COSO ERM 2017 has five components: Governance & Culture; Strategy & Objective-Setting; Performance; Review & Revision; and Information, Communication & Reporting.

A board states it will accept no more than a 5% decline in annual EBITDA from any single risk event. This statement best describes:

Answer: Risk tolerance

Risk tolerance is the acceptable amount of variation around a specific objective, often stated in measurable terms.

In the IIA Three Lines Model, which function typically provides independent assurance to the board?

Answer: Internal audit

Internal audit is the third line and gives the governing body independent, objective assurance.

Which metric is the best example of a key risk indicator (KRI) rather than a key performance indicator (KPI)?

Answer: Percentage of receivables more than 90 days past due

Rising aged receivables is a forward-looking warning sign of credit and liquidity risk, which is what a KRI measures.

Residual risk is best defined as:

Answer: Risk left over after management responses and controls are applied

Residual risk is the exposure that remains after mitigation; inherent risk is the exposure before any response.

Which risk response is a company using when it exits a product line because of unacceptable regulatory exposure?

Answer: Avoidance

Avoidance removes the exposure entirely by stopping the activity that creates the risk.

ISO 31000 differs from COSO ERM mainly in that ISO 31000:

Answer: Provides generic, principles-based guidelines that any organization can apply and is not certifiable

ISO 31000 is a voluntary, principles-based guideline for organizations of any type and is not meant for certification.

A US company expects a €10 million receivable in 90 days. Which hedge most directly locks in the dollar value?

Answer: Sell euros forward for 90 days

Selling euros forward fixes the USD amount the company will get for the euros it receives.

A one-day 95% VaR of $2 million means:

Answer: On 95% of days, losses should not exceed $2 million

VaR is a loss threshold at a given confidence level; it says nothing about how large losses can get in the tail beyond it.

Which measure addresses VaR's weakness of ignoring losses beyond the threshold?

Answer: Expected shortfall (conditional VaR)

Expected shortfall averages the losses that exceed the VaR threshold, so it captures tail severity.

The risk that a foreign subsidiary's financial statements change in value when consolidated into US dollars is called:

Answer: Translation exposure

Translation (accounting) exposure comes from converting foreign-currency statements into the reporting currency at consolidation.

A company with floating-rate debt worried about rising rates would most likely:

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

Paying fixed and receiving floating effectively turns floating-rate debt into fixed-rate debt.

A bond portfolio has a modified duration of 6. If yields rise by 1%, its value will approximately:

Answer: Fall 6%

Percentage price change ≈ −modified duration × yield change = −6 × 1% = −6%.

Under ASC 815, a key benefit of qualifying for hedge accounting is that it:

Answer: Matches the timing of hedge gains and losses with the hedged item, reducing earnings volatility

Hedge accounting aligns recognition of the derivative's results with the hedged exposure, smoothing reported earnings.

Which metric is most useful for measuring a company's short-term liquidity risk under stress?

Answer: Weeks of cash runway under a stressed 13-week cash flow forecast

A stressed short-term cash forecast shows directly whether the company can meet its obligations as they come due.

A company forms a wholly owned insurance subsidiary to insure its own risks. This is called a:

Answer: Captive insurer

A captive is an insurer owned by the parent to finance its own risks, and it can often access reinsurance markets.

Which contract clause most directly reduces counterparty credit risk on OTC derivatives?

Answer: A credit support annex (CSA) requiring collateral posting

A CSA under an ISDA master agreement requires collateral as exposure grows, which limits loss if the counterparty defaults.

Expected credit loss is commonly calculated as:

Answer: PD × LGD × EAD

Expected loss equals probability of default times loss given default times exposure at default.

A large, rarely used committed revolving credit facility mainly helps a CFO mitigate:

Answer: Funding liquidity risk

Committed facilities give a backstop source of cash if operating cash flow or market access dries up.

Requiring two different employees to approve and execute vendor payments is an example of mitigating which type of risk?

Answer: Operational (fraud) risk through segregation of duties

Segregation of duties is a key internal control that reduces the chance of error and fraud in operational processes.