CPA Notes 114

Topics: United States dollar, Forward contract, Derivative, Net present value, Option, Futures contract / Pages: 27 (7452 words) / Published: Oct 19th, 2014
FINANCIAL RISK
MANAGEMENT
FREQUENTLY ASKED QUESTIONS

Module 1 – Introduction to financial risk management
1. What are the major categories of risk? Please provide examples. (Topic heading: Main categories of risk controls SG 1.32)
Seven categories of risk are outlined. These are summarised in the table below:
Type of risk

Definition

Example

Liquidity

The risk of not being able to pay back what you owe due to the inability to convert assets into cash quickly, without materially moving the price.

Holding long-term property investments that cannot be converted into cash quickly to pay obligations as they fall due. Funding

The risk of funding support not being met by investors or bankers. An existing financier (e.g. bank) withdraws its funding commitment as a result of poor performance by the entity.

Interest rate

The risk of a change in interest rates impacting borrowing costs, interest income and/or asset/debt values. Central bank increases the cash rate and your company has a floating rate loan pegged to the cash rate.

Foreign exchange The risk of the foreign exchange rate fluctuating, impacting the currency conversion of revenues, expenses, assets and/or liabilities. Includes transaction, translation, competitive/economic and accounting exposures. If the AUD falls, an Australian importer of clothing from the US pays more AUD for the same amount of clothing.

Commodity price The risk of the change in price of a commodity, whether used as an input or generated as an output.

The price of iron ore falls as a result of a lack of confidence in general economic conditions, reducing revenues for an iron ore producer.

Credit

The risk of another party to a contract not meeting its obligations (i.e. defaulting).

A debtors declares bankruptcy, resulting in an uncollected receivable.

Operational

The risk of human or computer error/fraud impacting the financial results of the

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