Deck 17: Advanced Topics in Risk Management

Question 1

All of the following are considered a financial risk handled by financial risk management except:

A)currency risk
B)liquidity risk
C)product marketability risk
D)commodity price risk

Answer 1

C

Question 2

All the following are problems of risk management information systems (RMIS)except:

A)can generate massive amount of reports and data and slow down analysis
B)data inaccuracy and integrity can cause false reports
C)the speed of generating and the usefulness of the information can slow most analysis down
D)the large number of variables that need to be tracked can be difficult to isolate

Answer 2

C

Question 3

Traditional risk management is primarily concerned with:

A)speculative risks
B)insurance contracts
C)pure risks
D)subjective risks

Answer 3

C

Question 4

Hedging is

A)selling two investments that are both expected to lose
B)buying two investments that are both expected to make a profit
C)taking two positions whose gains and losses will offset each other
D)buying insurance against a fortuitous loss

Question 5

Risk managers are concerned with policy limits and deductible size contained in insurance contracts because:

A)an increased deductible amount increases the policy's premium
B)the policy limit and the deductible are the only determinants of whether the policy will pay the claim
C)they determine how much of the exposure the insured retains and transfers
D)premiums set by policy limit and deductible are not tax deductible whereas uninsured losses are deductible

Question 6

Which of the following would be least important in making the retention/transfer decision?

A)tax implications
B)social and ethical concerns
C)historical management policy
D)financial ability to pay losses

Question 7

All of the following tasks are performed by a risk management information system (RMIS)except:

A)track frequency, severity and final outcome of losses
B)provide statistical data to spot trends
C)provide insurance policy data and loss history
D)provide an instantaneous picture of the company's balance sheet

Question 8

Interest rate risk arises from changes in:

A)currency discount rates
B)the value of fixed income securities because of changes in interest rates
C)interest rates caused solely by inflation
D)the value of currency relative to another currency

Question 9

Risk managers working outside the U.S.often use admitted insurers,even when they are not legally required to do so by the foreign government. Why?

A)even when the foreign government does not require it, the US government does
B)this is part of the unwritten code of ethics that US risk managers voluntarily adhere to
C)it results in both premiums and losses being expressed in terms of local currency
D)because foreign insurance contracts are generally written in English

Question 10

Which of the following is true concerning the corporate taxation of insurance premiums and the treatment of uninsured losses?

A)both premiums and expected losses are deductible at the beginning of the year
B)uninsured losses are deductible only when they occur and premiums are deductible in the year paid
C)since payments for insured losses are 100% tax deductible, commercial insurance is economically inefficient
D)losses paid under the deductible amount are not tax deductible because the insured assumed the losses

Question 11

Which statement is true concerning the inclusion of risk in any retention/transfer decision?

A)the element of risk can be accurately included in the decision
B)because risk is a function of a known distribution, there is no need to include it as a factor
C)since the law of large numbers generally eliminates risk-making outcomes accurately predictable, risk is not a factor except in capital budgeting decisions
D)because individuals have different risk preferences and attitudes, risk cannot be accurately and consistently factored into the model

Question 12

To finance some uninsurable exposures,risk managers go to the "ART" market. What does ART stand for?

A)alternative risk management team
B)alternative risk transfer
C)actuarial risk transfer
D)actuarial risk types

Question 13

All the following are important in the transfer/retention decision related to the ability to pay for losses except:

A)liquidity of assets
B)stability of net income
C)amount of net worth
D)historical stockholder dividend pattern

Question 14

The difference in conditions (DIC)contract is designed to:

A)increase the policy limits on all liability coverages
B)broaden the legal liability policy coverage to cover intentional acts of foreign employees
C)increase the policy limits and lower deductibles of all property insurance contracts
D)fill the gaps in perils in basic property insurance contracts

Question 15

An insurer authorized to do business in a particular country is said to be:

A)admitted
B)legally licensed
C)participating
D)global

Question 16

Which of the following provides for the purchase of the legal right to buy or sell an asset at an agreed upon price for a set period of time?

A)forward contracts
B)interest rate swaps
C)future contracts
D)traded options

Question 17

Some political risk coverage is available to American firms doing business in less developed countries through the:

A)Federal Deposit Insurance Corporation (FDIC)
B)First National Bank of America
C)U)S. Export Import Bank
D)U)S. Chamber of Commerce

Question 18

Enterprise risk management is concerned with

A)both pure and speculative risks
B)insurance contracts
C)pure risks
D)subjective risks

Question 19

The most useful purpose of a risk management information system (RMIS)is to:

A)catalogue insurance policies
B)record, track, and analyze losses
C)maintain payroll and personnel records
D)calculate capital budgeting decisions

Question 20

Consider the differences between international risk management and domestic risk management.Which one of the following would be the least important concern in the international risk management function?

A)the physical perils causing the losses
B)the problem of foreign currency value fluctuations
C)political risks, meaning the unexpected intervention by foreign governments
D)the foreign risk financing and insurance arrangements

Question 21

Some U.S.insurers have local insurance operations in overseas markets.

Question 22

The main purpose of an RMIS is to record,track and analyze losses.

Question 23

Most goods in transit are not eligible for coverage under an open cargo marine insurance policy.

Question 24

Open cargo marine contracts provide a fixed amount of coverage for all transported property on an annual basis,regardless of the amount shipped.

Question 25

All RMIS systems are designed to record and analyze the same information regardless of the type and size of business.

Question 26

To lessen the impact of catastrophic losses,many insurers use all the following except:

A)contingent surplus notes
B)catastrophe bonds
C)forward purchase options
D)exchange traded options

Question 27

Currency risk is risk associated with the fluctuation of currency values relative to another currency.

Question 28

A difference in conditions (DIC)insurance contract provides high limits of legal liability coverage.

Question 29

One of the major problems associated with an RMIS is that if the data are inaccurate,any resulting analysis can be misleading.

Question 30

International risk management is identical in emphasis and complexity as domestic risk management.

Question 31

A financial instrument that's value is based on an underlying security or commodity is called a/an

A)insurance contract
B)employment contract
C)enterprise contract
D)derivative security

Question 32

Market risk,as discussed in the section on financial risk management,occurs when products are not acceptable to the market.

Question 33

What is a RMIS? How does a RMIS help the risk manager?

Question 34

An RMIS can communicate through national electronic bulletin boards and track OSHA bulletins.

Question 35

A traded option contract creates a legal right to buy or sell assets at a set price before a certain date.

Question 36

The term "over?insurance" includes purchasing a "low" deductible and purchasing higher than needed policy limits.

Question 37

The responsibility for loss of goods being shipped internally can be determined by looking at the contract between the importer and exporter.

Question 38

From 1997 to 2004,the amount of catastrophe bonds outstanding went from ____________.

A)$700 million to just over $2 billion
B)$700 million to over $4.4 billion
C)$1.9 billion to $4.4 billion
D)$4.4 billion to $700 million

Question 39

"Risk" can accurately be included in any transfer/retention decision relieving the user of the burden of making subjective decisions.

Question 40

The transfer/retention risk management decision is unimportant and therefore risk managers should not waste their time on the decision.

Question 41

What factors are emphasized more in international risk management than domestic risk management?

Question 42

Explain what is meant by financial risk management?

Question 43

What are the generic tools used to deal with the exposures in the area of financial risk management?

Question 44

What are the main considerations in determining the proper mix of retention and transfer in handling potential loss exposures?