CPFM Financial Risk Management 5

Question 1

Translation risk affects a multinational primarily through its:

Accepted Answer

Consolidation of foreign subsidiary financial statements

Answer

Translation risk arises when foreign subsidiary accounts are converted into the parent's reporting currency for consolidation.

Question 2

A call option gives the holder the right to:

Accepted Answer

Buy an asset at a set strike price

Answer

A call option grants the right, but not the obligation, to buy the underlying at the strike price.

Question 3

Concentration risk in a credit portfolio is reduced by:

Accepted Answer

Spreading exposure across many borrowers and sectors

Answer

Diversifying across counterparties and industries lowers the impact of any single default or sector downturn.

Question 4

Settlement (Herstatt) risk arises when:

Accepted Answer

One party delivers but the counterparty fails to deliver its side

Answer

Settlement risk occurs in transactions where timing differences mean one side pays before receiving the counter-value.

Question 5

The Sharpe ratio measures:

Accepted Answer

Excess return per unit of total risk (volatility)

Answer

The Sharpe ratio divides a portfolio's return above the risk-free rate by its standard deviation.

CPFM Practice Test