FRM Financial Risk Manager Practice Test

Explanation
Financial risk management focuses on managing risks related to the financial aspects of an organization. It involves identifying, assessing, and mitigating risks that could impact the financial stability and performance of the organization. Market risk, operational risk, and credit risk are all directly related to financial activities and are within the scope of financial risk management. However, health risk is not directly related to financial activities and is therefore not within the scope of financial risk management.

Explanation
The Basel Accords are a set of international banking regulations that aim to ensure the stability and soundness of the global financial system. They primarily focus on capital adequacy, risk management, and supervision. While tracking, exposure of operational risk, and reporting are all important aspects of the Basel Accords, management of human error is not specifically mentioned as a reason for adopting these regulations.

Explanation
Finance theory encourages taking on a project if it improves the shareholder value. This theory suggests that the primary goal of a firm is to maximize shareholder wealth, and decisions should be made based on the financial impact they have on the company and its shareholders. By considering the financial aspects of a project, such as its potential return on investment and impact on cash flows, finance theory helps guide decision-making towards projects that are expected to create value for shareholders.

Explanation
Food conservation companies do not typically engage a financial risk manager because their primary focus is on preserving and packaging food products. Financial risk management is more commonly required in industries such as asset management, consulting, and banking, where there is a greater need to assess and mitigate financial risks associated with investments, consulting services, and banking operations.

Explanation
Taxation is not directly related to financial risk management. Financial risk management involves identifying, analyzing, and mitigating potential risks that could impact a company's financial performance. This includes risks related to investments, market fluctuations, credit, liquidity, and operational factors. Taxation, on the other hand, is a separate area that deals with the calculation and payment of taxes based on applicable laws and regulations. While taxation can have financial implications for a company, it is not specifically focused on managing financial risks.

Explanation
Quantitative analysis involves using tools and mathematical models to analyze data and make predictions. However, risk management, operational risk measurement and management, and market risk measurement all involve using various tools and techniques to assess and mitigate risks in different areas of business. Therefore, the option "Quantitative analysis" is the correct answer as it does not involve using tools.

Explanation
There are three kinds of exchange risk exposure that are of concern in financial management. These include transaction exposure, economic exposure, and translation exposure. Transaction exposure refers to the risk of loss due to fluctuations in exchange rates during the time between entering into a transaction and settling it. Economic exposure refers to the risk of loss due to changes in exchange rates impacting the overall competitiveness and profitability of a firm. Translation exposure refers to the risk of loss due to fluctuations in exchange rates when converting the financial statements of a foreign subsidiary into the reporting currency of the parent company.

Explanation
The odd one out in this list is "Records exposure". Economic exposure, accounting exposure, and transaction exposure are all types of foreign exchange exposure that relate to the impact of currency fluctuations on a company's financial position. However, "Records exposure" is not a commonly recognized term in the context of foreign exchange exposure. It is possible that this term is either not well-known or not widely used in the field of foreign exchange.

Explanation
Inflation risk refers to the potential increase in the cost of goods and services over time. This can lead to higher prices for businesses, which can impact their profitability and financial stability. Therefore, an increase in the risk of inflation can pose a threat to businesses and their ability to maintain their operations and profitability.

Explanation
The correct answer is two types. In financial risk management, there are two main types of liquidity that are of concern. The first type is market liquidity, which refers to the ability to buy or sell an asset quickly without causing a significant change in its price. The second type is funding liquidity, which refers to the ability to obtain funding or cash quickly to meet financial obligations. Understanding and managing these two types of liquidity is crucial in mitigating financial risks and maintaining financial stability.