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Investment Risk Management Strategies

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Questions and Answers

Which aspect does credit risk mainly refer to?

Possibility of tax reliefs.

Assistance in risk transfer.

Facilitation of rapid recovery from risks.

Failure of the counter-party to honor its side of the contract. (correct)

What is the main goal of financial risk management as described in the text?

Maximize costs associated with renegotiation of debt.

Avoid restructuring of capital.

Avoid loss of reputation in the financial markets. (correct)

Minimize shareholders' wealth.

In financial risk management, what is the purpose of risk transference strategy?

Minimize risk exposure in figures.

Turn losses into tax reliefs.

Shift risk to another party. (correct)

Assist in risk acceptance.

Which type of risk is considered the biggest risk that financial institutions take according to the text?

Credit risk (B) Signup and view all the answers

In what scenario does settlement risk occur?

After the contract's settlement. (A) Signup and view all the answers

How does financial risk management aim to reduce costs associated with credit risk in derivative transactions?

By ensuring contracts are honored. (D) Signup and view all the answers

What is the primary focus of traditional credit (loans) risk compared to trading credit risk?

Pre-settlement risks (A) Signup and view all the answers

Why is credit risk considered a significant factor in financial institutions?

'It is by far the biggest they take.' (D) Signup and view all the answers

What is settlement risk related to in trading transactions?

Trading counter-party default at settlement. (D) Signup and view all the answers

How does credit risk impact derivative transactions according to the text?

'There can be costs for replacing existing contracts.' (C) Signup and view all the answers