Enterprise risk management The process of enterprise risk management relies on a variety of activities and instruments characterized by specific and often confusing meanings. To ensure that the meaning of these terms are clear in your mind, match the terms relating to the basic terminology and concepts associated with the process of enterprise risk management on the left with the descriptions of the terms on the right. Read all descriptions first and then make the best match between each description and term. Choose the letter of the description in the Answer column next to the correct term. (Note: These are not necessarily complete definitions, but there is only one possible answer for each term.) Term Answer Derivative A. Enterprise risk management B. Hedge C. Swap D. Description This process is undertaken by an organization's board of directors, management, and other personnel to identify potential events that could affect the organization in achieving its objectives. This phenomenon occurs when the gain or loss on a hedged transaction exactly offsets the loss or gain on the unhedged position. This security's value is determined by the yield or market price of another security or asset. In this transaction, a business or individual invests in two different assets or cash flow- generating activities, and the cash flows produced by the assets are mirror images of one another. As a result of this transaction, the risk associated with one asset can be reduced or exactly offset by the second asset. This derivative transaction allows Addison to exchange the cash flows generated by her financial instrument with the cash flows generated by Tyler's financial security. This is a standardized contract to buy or sell a specific asset of a standardized quantity and quality, at a price that is agreed on today but for delivery at a specified future date, that is traded in on an exchange and marked-to-market daily. Futures contract E. Perfect hedge F. Natural hedge G. Non-linear hedging strategy H. In this transaction, a hedger takes advantage of a known, current price on a futures contract to purchase a specified quantity of an underlying physical commodity or financial asset that will be delivered on specified date in the future. By participating in this transaction, the hedger is protected against potential increases in the price of the underlying asset. This practice involves taking a position in one market or financial asset to completely or partially reduce a risk exposure in another market or asset. This nonstandardized financial contract allows a business or individual to purchase or sell an asset today at a price agreed on today but with the physical delivery of the asset occurring at some agreed-on date in the future. An investment transaction, this is intended to provide a greater protection against one direction of potential price movements (for example, increases) than against price movements in the other direction (for example, decreases). Long hedge I. Forward contract J
