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Questions and Answers
Financial risk management is not concerned with reducing the volatility of earnings.
Financial risk management is not concerned with reducing the volatility of earnings.
False (B)
Financial risk refers to the certainty of expected results without any deviation.
Financial risk refers to the certainty of expected results without any deviation.
False (B)
Changes in market prices do not impact the financial risk faced by organizations.
Changes in market prices do not impact the financial risk faced by organizations.
False (B)
A firm is not exposed to financial risk if only its assets are affected by changes in financial parameters.
A firm is not exposed to financial risk if only its assets are affected by changes in financial parameters.
Financial risk management does not aim to boost the confidence of investors in the company.
Financial risk management does not aim to boost the confidence of investors in the company.
Financial risk management focuses on avoiding costs related to renegotiation of debt, restructuring of capital, and legal fees.
Financial risk management focuses on avoiding costs related to renegotiation of debt, restructuring of capital, and legal fees.
One of the benefits of financial risk management is turning losses into tax reliefs.
One of the benefits of financial risk management is turning losses into tax reliefs.
Financial risk management does not involve estimating risk exposure in figures.
Financial risk management does not involve estimating risk exposure in figures.
Avoiding the loss of reputation in financial markets is not a goal of financial risk management.
Avoiding the loss of reputation in financial markets is not a goal of financial risk management.
By preventing undesirable situations, financial risk management ensures that management is primarily focused on running the business efficiently.
By preventing undesirable situations, financial risk management ensures that management is primarily focused on running the business efficiently.
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Study Notes
Introduction to Financial Risk
- Financial risk is a state of uncertainty about expected results, which means a deviation from expected values of return.
- Risk refers to the probability of loss, but also presents an opportunity for gain or profit.
- Financial risk is the probability of losses resulting from events such as changes in market prices.
Exposure to Financial Risk
- A firm is exposed to financial risk when the value of its assets, liabilities, operating incomes, and cash flows are affected by changes in financial parameters such as:
- Interest rates
- Exchange rates
- Stock indicators
- Financial risk management aims to reduce the volatility of earnings and boost the confidence of investors in the company.
Benefits of Financial Risk Management
- The real benefits of financial risk management are understood in terms of what it tries to avoid rather than what it tries to do.
- Financial risk management:
- Prevents undesirable situations, allowing management to focus on running the business efficiently.
- Aims to maximize shareholders' wealth by avoiding costs associated with:
- Renegotiation of debt
- Restructuring of capital
- Legal fees
- Loss of reputation in the financial markets due to failure to meet obligations
- Estimates risk exposure in figures
- Assists risk transfer
- Turns losses into tax reliefs
- Facilitates rapid recovery from risks
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