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21 Cards in this Set
- Front
- Back
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Systematic risks arise from the economic environment in which all companies operate Give three example? |
Including changes in interest rates, exchange rates commodity prices. |
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Unsystematic risks are specific to the particular activities of the company |
such as fire, lawsuits and fraud. |
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The different stages in the financial risk management process are? |
Identifying the risk exposure Quantifying the exposure Managing the risk |
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What can be used to measure the company's exposure to various risk factors? |
Regression analysis R = α + β1INT + β2FX + β3OIL + e Where: R represents changes in the company's cash flows. INT represents changes in interest rates. FX represents changes in exchange rates. OIL represents changes in oil prices. |
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Quantification by simulation evaluates the sensitivity of the value of the company or the company's cash flows to a variety of simulated values of the various risk factors. How? |
The simulated values are based on the probability distribution of the risk factors that is believed to capture or approximate the possible changes in the risk factors. |
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Quantification by expected value a The relevant formulae is? |
Expected value or mean cash flow: E(X) = ΣPi Xi Xi = Possible values of the random variable X Pi = Corresponding probability that Xi would occur E(X) = Expected value or mean cash flow |
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Quantification standard deviation where standard deviation is a measure of the dispersion of the possible values from the expected value or mean. |
σ = √Σ Pi [Xi-E(X)]2 Xi = Possible values of the random variable X Pi = Corresponding probability that Xi would occur E(X) = Expected value or mean cash flow |
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Quantification by value at risk (VaR) is? |
where VaR measures the maximum loss possible due to normal market movements in a given period of time with a stated probability. |
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How do you calculate n day value at risk? |
1 day VAR time square root of n |
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To calculate VaR what three steps should be followed? |
Step 1: Calculate the daily volatility (standard deviation) of the underlying asset. Step 2: Use statistical tables to determine the standard normal value (Z) associated with the given one-tail confidence level, X%. Step 3: Multiply these two results together and obtain the daily X% VaR. |
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A company can manage risk in the following ways? |
Accept the risk Manage the risk using internal (operating) techniques Manage the risk using external (derivative) hedging techniques |
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The internal hedging techniques for managing interest-rate risks are? |
Smoothing: Matching: Netting: |
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What is Smoothing? |
This technique achieves an acceptable balance betweenrisks by combining fixed rate and floating rate borrowing |
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What is Matching? |
This technique offsets the risks associated with a company's financial assets against its debts. |
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What isNetting? |
This technique views risk on the basis of net position after assets and liabilities have been offset. |
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The external hedging techniques for managing interest-rate risks are ? |
Interest-rate swap Forward-rate Interest-rate future Interest-rate option Swaption |
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What isInterest-rate swap |
Interest-rate swap is the exchange of one stream of interest payments for another in the same currency. |
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What isForward-rate agreement |
Forward-rate agreement whereby an enterprise can lock in an interest rate today for a period of time starting in the future. |
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What isInterest-rate future |
Interest-rate future is the standardised traded form of forward-rate agreements. These are exchange traded and each contract is for a pre-specified amount and a pre-specified date. |
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what is Interest-rate option |
Interest-rate option is the right, but not the obligation, to carry out a transaction at a price set today, at some time in the future. |
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What isSwaption ? |
Swaption is an option on a swap. It gives the holder of the swaption the right, but not the obligation, to enter into a swap agreement with the seller of the swaption, on or before a fixed future date. |
