CFO Risk Management — Questions and Answers

Question 1: Under the 2017 COSO ERM framework (Integrating with Strategy and Performance), how many components are there?

Seventeen
Five (Correct answer)
Three
Eight

Correct answer: Five

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

Question 2: A board states it will accept no more than a 5% decline in annual EBITDA from any single risk event. This statement best describes:

Risk appetite
Risk tolerance (Correct answer)
Inherent risk
Risk capacity

Correct answer: Risk tolerance

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

Question 3: In the IIA Three Lines Model, which function typically provides independent assurance to the board?

Risk management and compliance
Operational management
External regulators
Internal audit (Correct answer)

Correct answer: Internal audit

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

Question 4: Which metric is the best example of a key risk indicator (KRI) rather than a key performance indicator (KPI)?

Earnings per share
Gross margin percentage
Quarterly revenue growth
Percentage of receivables more than 90 days past due (Correct answer)

Correct 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.

Question 5: Residual risk is best defined as:

Risk the company has transferred to an insurer
Risk that exists before management takes any action
Risk left over after management responses and controls are applied (Correct answer)
The maximum risk the company can absorb before it becomes insolvent

Correct 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.

Question 6: Which risk response is a company using when it exits a product line because of unacceptable regulatory exposure?

Sharing
Avoidance (Correct answer)
Acceptance
Reduction

Correct answer: Avoidance

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

Question 7: ISO 31000 differs from COSO ERM mainly in that ISO 31000:

Provides generic, principles-based guidelines that any organization can apply and is not certifiable (Correct answer)
Replaces the need for internal controls over financial reporting
Applies only to financial institutions
Is a mandatory SEC reporting standard

Correct 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.

Question 8: A US company expects a €10 million receivable in 90 days. Which hedge most directly locks in the dollar value?

Buy euros forward for 90 days
Buy a euro call option
Enter a receive-fixed interest rate swap
Sell euros forward for 90 days (Correct answer)

Correct answer: Sell euros forward for 90 days

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

Question 9: A one-day 95% VaR of $2 million means:

On 95% of days, losses should not exceed $2 million (Correct answer)
The maximum possible one-day loss is $2 million
The firm will lose exactly $2 million on 5% of days
Expected daily loss is $2 million

Correct 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.

Question 10: Which measure addresses VaR's weakness of ignoring losses beyond the threshold?

Expected shortfall (conditional VaR) (Correct answer)
Sharpe ratio
Macaulay duration
Beta

Correct answer: Expected shortfall (conditional VaR)

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

Question 11: The risk that a foreign subsidiary's financial statements change in value when consolidated into US dollars is called:

Settlement exposure
Transaction exposure
Economic exposure
Translation exposure (Correct answer)

Correct answer: Translation exposure

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

Question 12: A company with floating-rate debt worried about rising rates would most likely:

Buy an interest rate floor
Enter a receive-fixed, pay-floating interest rate swap
Sell an interest rate cap
Enter a pay-fixed, receive-floating interest rate swap (Correct answer)

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

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

Question 13: A bond portfolio has a modified duration of 6. If yields rise by 1%, its value will approximately:

Fall 0.6%
Fall 6% (Correct answer)
Rise 6%
Fall 1%

Correct answer: Fall 6%

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

Question 14: Under ASC 815, a key benefit of qualifying for hedge accounting is that it:

Matches the timing of hedge gains and losses with the hedged item, reducing earnings volatility (Correct answer)
Eliminates the need to document the hedging relationship
Removes all derivatives from the balance sheet
Allows derivatives to be carried at historical cost

Correct 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.

Question 15: Which metric is most useful for measuring a company's short-term liquidity risk under stress?

Weeks of cash runway under a stressed 13-week cash flow forecast (Correct answer)
Price-to-earnings ratio
Return on invested capital
Debt-to-equity ratio

Correct 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.

Question 16: A company forms a wholly owned insurance subsidiary to insure its own risks. This is called a:

Reciprocal exchange
Captive insurer (Correct answer)
Risk retention pool
Surplus lines carrier

Correct answer: Captive insurer

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

Question 17: Which contract clause most directly reduces counterparty credit risk on OTC derivatives?

A force majeure clause
An arbitration clause
A credit support annex (CSA) requiring collateral posting (Correct answer)
A most-favored-nation clause

Correct 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.

Question 18: Expected credit loss is commonly calculated as:

LGD − PD
PD + LGD + EAD
PD × LGD × EAD (Correct answer)
EAD ÷ (PD × LGD)

Correct answer: PD × LGD × EAD

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

Question 19: A large, rarely used committed revolving credit facility mainly helps a CFO mitigate:

Inflation risk on wages
Foreign exchange translation risk
Commodity price risk
Funding liquidity risk (Correct answer)

Correct answer: Funding liquidity risk

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

Question 20: Requiring two different employees to approve and execute vendor payments is an example of mitigating which type of risk?

Basis risk
Operational (fraud) risk through segregation of duties (Correct answer)
Strategic risk
Market risk

Correct 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.

Question 21: A heavy concentration of revenue from one customer mainly exposes the company to:

Translation risk
Interest rate risk
Concentration risk affecting both credit and revenue (Correct answer)
Basis risk

Correct answer: Concentration risk affecting both credit and revenue

Relying on one customer means its default or departure could sharply hit both collections and revenue.

CFO Risk Management

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

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