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IBODI Risk Management Guidelines

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Questions and Answers

What is the main characteristic of a Conservative Financing Policy?

It reduces liquidity risk but also reduces profit due to greater financing costs.

Which current asset is considered the most liquid?

Cash

What is the main objective of a Working Capital Policy?

To provide the highest expected ROI while managing risk.

What is the primary risk associated with an Aggressive Financing Policy?

Liquidity risk due to low working capital position. Signup and view all the answers

What is the principle underlying the Maturity Matching Policy?

Matching the maturities of obligations to the income (cash flow) generating characteristics of the assets financed. Signup and view all the answers

What is the primary drawback of holding large amounts of inventory?

It is less liquid and ties up funds that could be used elsewhere. Signup and view all the answers

What is the main difference between a Moderate and a Relaxed Current Investment Policy?

A Moderate policy is a balance between Relaxed and Restricted policies. Signup and view all the answers

What is the primary benefit of using short-term investments, such as money market instruments?

They are very liquid and provide a low-risk return. Signup and view all the answers

What is the primary goal of Liquidity Management?

To ensure that the firm has sufficient liquid assets to meet its short-term obligations. Signup and view all the answers

What is the primary role of Risk Management in Working Capital Policy?

To manage and mitigate the risks associated with working capital investments. Signup and view all the answers