CPFM Financial Risk Management 2

Question 1

A company holds receivables denominated in euros while reporting in U.S. dollars. What type of risk does this exposure primarily represent?

Accepted Answer

Transaction (foreign exchange) risk

Answer

Interest rate risk

Answer

Commodity price risk

Answer

Operational risk

Question 2

Which instrument is most commonly used to hedge the risk of rising interest rates on a floating-rate loan?

Accepted Answer

Interest rate swap (pay fixed, receive floating)

Answer

Currency forward

Answer

Commodity futures

Answer

Credit default swap

Question 3

Value at Risk (VaR) at a 95% confidence level over one day is best described as:

Accepted Answer

The maximum loss expected to be exceeded only 5% of the time

Answer

The guaranteed maximum loss possible

Answer

The average daily gain

Answer

The total capital at risk

Question 4

A key limitation of standard VaR is that it:

Accepted Answer

Does not describe the magnitude of losses beyond the VaR threshold

Answer

Always overstates risk

Answer

Cannot be calculated for equities

Answer

Eliminates tail risk entirely

Question 5

Which risk measure addresses the shortcoming of VaR by averaging losses in the tail?

Accepted Answer

Conditional VaR (Expected Shortfall)

Answer

Standard deviation

Answer

Beta

Answer

Sharpe ratio

Question 6

Diversification reduces which type of risk?

Accepted Answer

Unsystematic (specific) risk

Answer

Systematic (market) risk

Answer

Sovereign risk

Answer

Inflation risk

Question 7

A natural hedge for a U.S. exporter with euro revenues would be to:

Accepted Answer

Incur euro-denominated costs or debt

Answer

Borrow more in U.S. dollars

Answer

Buy additional euro assets

Answer

Increase dollar receivables