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12 Cards in this Set
- Front
- Back
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Explain stockholders interest in volatile cash flows.
Ch. 23 |
If volatility in cash flows is not caused by systematic risk, then stockholders can eliminate the risk of volatile cash flows by diversifying their portfolios.
Stockholders might be able to reduce impact of volatile cash flows by using risk management techniques in their own portfolios. |
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How does risk management increase the value of a corporation?
Ch. 23 |
It allows firms to...
1. Have a greater debt capacity 2. Implement the optimal capital budget without having to raise external equity in years that would have had low cash flow due to volatility 3. Avoid costs of financial distress 4. Utilize comparative advantages in hedging relative to hedging ability of investors 5. Reduce borrowing costs 6. Maximize bonuses if system has floor or ceiling 7. Minimize negative tax effects |
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What is ERM?
Ch. 23 |
A process applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.
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What are the three dimensions of ERM?
Ch. 23 |
1. Level of organization
2. Categories of objectives 3. Risk management components |
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What are the eight components of ERM?
Ch. 23 |
1. Internal environment
2. Objective setting 3. Risky event identification 4. Risk event assessment 5. Risky event responses 6. Control activities 7. Information & communication 8. Monitoring |
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What are the seven categories of risk?
Ch. 23 |
1. Strategy and reputation
2. Control and compliance 3. Hazards 4. Human resources 5. Operations 6. Technology 7. Financial management |
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What can a company do to minimize or reduce risk exposures?
Ch. 23 |
1. Transfer risk to an insurance company
2. Transfer functions 3. Share risk with a third party 4. Reduce the probability of occurrence of adverse events 5. Reduce the magnitude of the loss associated with adverse events 6. Avoid activities that give rise to risk |
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What are forward contracts?
Ch. 23 |
Two parties to contract.
1. One party is "long" - obligated to buy underlying asset at some fixed price in the future 2. One party is "short" - obligated to sell underlying asset at some fixed price in the future Common for currencies. |
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What are future contracts?
Ch. 23 |
Similar to forward contracts, except...
1. Daily marking-to-market 2. Many more assets 3. Standardized contracts that trade on exchanges |
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How can commodity futures markets be used to reduce input price risk?
Ch. 23 |
The purchase of a commodity futures contract allows a firm to make a future purchase at today's price, even if the market price on the item has risen substantially in the interim.
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What are the types of swaps?
Ch. 23 |
1. Swap floating-rate payments for fixed-rate payments
2. Swap payments in one currency for payments in another currency 3. Many other types |
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What is the market like for swaps?
Ch. 23 |
1. No central market
2. Not a transparent market |
