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

Foreign-currency receivables expose the firm to transaction risk because exchange-rate movements alter the dollar value of the amount collected.

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

A pay-fixed/receive-floating swap converts floating-rate exposure into a fixed cost, neutralizing the impact of rising rates.

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

A 95% one-day VaR estimates a loss threshold that should be exceeded on only about 5% of trading days.

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

VaR identifies a loss threshold but says nothing about how severe losses can become once that threshold is breached.

Question 5

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

Accepted Answer

Conditional VaR (Expected Shortfall)

Answer

Conditional VaR, or Expected Shortfall, averages the losses that occur beyond the VaR cutoff.

CPFM Practice Test