Exam (elaborations)
ARM 401-9 FINANCIAL RISK: QUESTIONS & SOLUTIONS
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ARM 401-9 FINANCIAL RISK: QUESTIONS & SOLUTIONS
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ARM 401-9 FINANCIAL RISK: QUESTIONS & SOLUTIONSFinancial risks Right Ans - speculative risks associated with the effects of
market forces on financial assets and/or liabilities
Three types of financial risks Right Ans - 1. market
2. credit
3. price
Market risk Right Ans - uncertainty about an investments future value due
to changes in the market for that type of investment
Both positive and negative potential
Three types
a. interest rate risk
b. exchange rate risk
c. liquidity risk
Interest rate risk Right Ans - uncertainty over changes in interest rates and
the effect of those changes on a securities future value
Ex. a firm invests $1m in a 10 yr gvmt bond that pays 3% interest annually.
next year, if newly issued bonds pay 3.5%, the MV of these bonds will drop. If
newly issued bonds pay 2.5%, the MV of these bonds will inc.
Exchange rate risk Right Ans - the risk that changes in exchange rate will
affect the value of a firm's assets and liabilities
Ex. if the USD depreciates against the euro, one dollar buys fewer euros. A US
buyer who is making installment payment s in euros will need to pay more
dollars to make the stated payments in Euros
Liquidity risk Right Ans - represents uncertainty about the ability to
convert an investment to cash quickly with little loss of principle (w/in a short
time pd and a small price range)
Credit Risk Right Ans - the change that a debtor will not pay his obligations
as they come due. credit risk has ONLY negative potential
, Price Risk Right Ans - unanticipated change in the cost of inputs or prices
of products
Both positive and negative potential
Two aspects:
a. output
b. input
Output price risk Right Ans - the price charged for the firm's products or
services
Input price risk Right Ans - the price of resources used to make the firm's
products
Balance sheet Right Ans - snapshot of firm's financial position at a given
point in time
Balance sheet lists the firms Right Ans - 1. assets
2. liabilities
3. SH equity (aka owner's equity/net worth or book value or surplus), (the
residual amounts owned by the firm's owners)
BS equation Right Ans - assets=liabilities+SHE
Assets are either Right Ans - 1. current assets
2. noncurrent assets
Current assets Right Ans - cash or assets likely to be converted to cash or
consumed w/in 1 year
Ex. marketable securities, A/R, inv
Noncurrent assets Right Ans - not likely to be converted to cash or
consumed w/in one year
Noncurrent assets are either Right Ans - 1. tangible
2. intangible
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