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An Introduction to Derivatives and Risk Management: With Stock-Trak Coupon

Don M. Chance, Robert Brooks

Chapter 16

Managing Risk in an Organization - all with Video Answers

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Chapter Questions

Problem 1

Explain why end users, who conduct their risk management operations in the treasury department, should not require the treasury department to be a profit center.

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Problem 2

Distinguish the typical objectives of a dealer engaging in a derivatives transaction from those of an end user.

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Problem 3

Iden tify the two primary types of derivatives specialists within a dealer organization.

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Problem 4

Discuss the advantages and disadvantages of a centralized versus a decentralized risk management operation of an end user firm.

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Problem 5

Explain the difference between centralized and enterprise risk management.

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Problem 6

Distinguish between the front office and the back office of a derivatives dealer. Explain why it is important to keep the front and back offices separate.

Rashmi Sinha
Rashmi Sinha
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Problem 7

Explain why the traditional auditing function cannot serve as the risk management function.

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Problem 8

Why is hedge accounting used and how can it be misused?

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Problem 9

Explain how an organization determines whether a hedge is sufficiently effective to justify hedge accounting.

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Problem 10

Describe the primary differences between accounting for fair value hedges and accounting for cash flow hedges.

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Problem 11

Identify the three ways in which U.S. companies can satisfy the SEC requirement that they disclose how they use derivatives to manage risk.

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Problem 12

Summarize in one sentence how each of the following organizations failed to practice risk management:
a. Metallgesellschaft
b. Orange County
c. Barings
d. Proctor and Gamble

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02:10

Problem 13

Explain the difference between the purposes of the G-30 Recommendations and the Risk Standard Working Group Recommendations.

Patina Herring
Patina Herring
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02:22

Problem 14

What responsibilities does senior management assume in a risk management system?

Sanchit Jain
Sanchit Jain
Numerade Educator
02:22

Problem 15

What is the most important component of an effective risk management system?

Sanchit Jain
Sanchit Jain
Numerade Educator

Problem 16

Briefly explain how speculative derivatives transactions are treated from an accounting perspective.

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Problem 17

One responsibility of senior management is to identify acceptable risk management strategies. Identify three categories of risk, focusing on broad classifications and not on specific types of risks.

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01:08

Problem 18

Identify and discuss five problems with regard to the application of FAS 133.

Carson Merrill
Carson Merrill
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Problem 19

Suppose that a firm engages in a derivative transaction that qualifies for fair value hedging. The firm holds a security and hedges it by selling a derivative. During the course of the hedge, the security increases in value by $$\$ 20,000$$, while the derivative decreases in value by $$\$ 22,000$$. Explain what accounting entries would be done and how the firm's earnings and balance sheet would be affected.

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Problem 20

Suppose that a firm plans to purchase an asset at a future date. The forward price of the asset is $$\$ 200,000$$. It hedges that purchase by buying a forward contract at a price of $$\$ 205,000$$. During the hedging period, the forward contract incurs a paper loss of $$\$ 15,000$$. At the end of the hedge, the forward contract has lost an accumulated value of $$\$ 20,000$$ and the asset is $$\$ 20,000$$ cheaper. Explain what accounting entries would be done and how the firm's earnings and balance sheet would be affected. What would be different if it were not an effective hedge?

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