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 Enterprise risk management Hedge B c. Swap E Futures contract F BY Perfect hedge B Description These are the methods and process by which organizations manage risks and capitalize on opportunities to achieve their objectives. B. 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. D. 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. E. This derivative transaction allows Liam to exchange the cash flows generated by financial instrument with the cash flows generated by Bridget's financial security. F. 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. G. 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. H. This is a situation in which the aggregate risk can be reduced by derivatives transactions between two parties. I. 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. A financial, risk-reduction transaction, this is designed to provide greater protection against price movements in one direction (for example, decreases) than against price movements in the other direction (for example, increases), or vice versa. Natural hedge D Non-linear hedging strategy ov GV Long hedge Forward contract I J
