Question #1 of 10 Question ID: 1256540
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Question #2 of 10 Question ID: 1256541
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Two institutional investors are engaging in a swap transaction as counterparties. At the end of swap tenor, the
counterparty in the losing position refuses to pay and fulfill its obligations. Which of the following types of credit risk
describes the situation?
Bankruptcy risk.
Default risk.
Downgrade risk.
Settlement risk.
Explanation
On a settlement date, one of the counterparties is in a net loss ("losing") position and the other is in a net gain
("winning") position. Settlement risk refers to the losing party simply refusing to pay and fulfill its obligations.
Settlement risk is distinct from default risk because the latter refers specifically to the nonpayment of interest and/or
principal on a loan by the borrower to the lender.
Module 1.2, LO 1.f)
A risk management consultant is considering the feasibility of hedging several risk exposures at Firm XYZ.
Regarding the advantages and disadvantages of hedging risk exposures in practice, which of the following actions
will least likely result from hedging activities for the firm?
Lower cost of equity capital.
Operational stability.
Lower cost of debt capital.
Lower compliance costs.
Explanation
FRM Part I
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Question #3 of 10 Question ID: 1256542
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Question #4 of 10 Question ID: 1256543
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Hedging activities incur compliance costs related to disclosure and accounting. (Module 2.1, LO 2.c)
The board of directors of a firm must always consider best practices in both corporate governance and risk
management. Which of the following activities is a best practice in corporate governance?
Board sets up an ethics committee.
Board introduces a chief risk officer.
Board approves all major transactions.
Board focuses on firm’s economic over accounting performance.