MENU
Under the contingent claims approach to credit risk, risk increases when:
1. Volatility of the firm's assets increases
2. Risk free rate increases
3. Maturity of the debt increases
Suggested Answer: B
Get Premium 8010 Questions
as Interactive Web-Based Practice Test or PDF
Real Exam Format
Detailed Explanations
Instant Access
Get Your Practice Test
The point that this question is trying to emphasize is the independence of the risk management function. The risk function should be segregated from the risk taking functions as to maintain independence and objectivity.
Choice 'd', Choice 'c' and Choice 'a' run contrary to this requirement of independence, and are therefore not correct. The risk function should report directly to senior levels, for example directly to the audit committee, and not be a part of the risk taking functions.
27 comments · newest first
EL
Elizabeth
10 months ago
I’d say 1 and 3 make the most sense here.
GA
Gayla
11 months ago
Wait, are we sure about all three factors increasing risk? Seems off.
AL
Alethea
11 months ago
Totally agree, maturity plays a big role in risk assessment.
JU
Juliana
11 months ago
I think 2 is a stretch, not sure it really impacts credit risk.
GL
Glenna
11 months ago
Definitely, risk goes up with asset volatility!
KA
Kattie
12 months ago
I’m leaning towards option C because it seems like all three factors would logically increase credit risk under the contingent claims approach.
SH
Shawnee
12 months ago
I feel like all three factors could contribute to increased risk, but I can't recall if the risk-free rate really matters in this context.
BE
Ben
12 months ago
I think I saw a practice question where increasing debt maturity was linked to higher risk. So maybe B is right?
MY
My
1 year ago
I remember studying that higher asset volatility definitely increases credit risk, but I'm not sure about the risk-free rate.
FR
Franchesca
1 year ago
I'm a bit confused by this question. I know the contingent claims approach is used to model credit risk, but I'm not sure I fully understand how each of these factors impacts the risk. I'll have to review my notes and maybe ask the professor for some clarification before the exam.
EM
Emmett
1 year ago
Okay, let me walk through this step-by-step. If the volatility of the firm's assets increases, that makes the firm's default more likely, so that increases risk. And if the risk-free rate goes up, that also increases the risk. The maturity of the debt is trickier, but I think the longer the maturity, the higher the risk. So I'm going to go with C on this one.
KA
Kate
1 year ago
Hmm, I'm a little unsure about this one. I know the contingent claims approach is related to credit risk, but I'm not totally clear on how the different factors impact the risk. I'll have to think this through carefully.
TW
Twanna
1 year ago
This one seems pretty straightforward. I think the answer is C - risk increases when volatility of the firm's assets, the risk-free rate, and the maturity of the debt all increase.
BE
Benedict
1 year ago
D) 1 and 2 makes the most sense to me. The risk-free rate and asset volatility are the crucial elements in this model. Time to brush up on my contingency planning!
LO
Lon
1 year ago
User 3: I'm leaning towards D) 1 and 2, the risk-free rate and asset volatility seem like the key factors here.
EL
Elvera
1 year ago
User 2: I agree, but I also think B) 1 and 3 could be possible since asset volatility is important too.
TW
Twila
1 year ago
User 1: I think it's A) 2 and 3 because both the risk-free rate and debt maturity affect risk.
VO
Von
1 year ago
B) 1 and 3 seems like the obvious choice here. Volatility and maturity are the key drivers of credit risk, right? Or am I missing something?
JU
Julio
1 year ago
Whoa, this question is like a triple-decker sandwich of risk factors! I better not mess this one up or my employer will have my head on a platter.
MA
Makeda
2 years ago
I think the correct answer is C) 1, 2 and 3. Under the contingent claims approach, all three factors increase the risk of credit default.
HE
Helene
1 year ago
Yes, that's correct. All three factors play a role in determining credit risk under the contingent claims approach.
KA
Kallie
1 year ago
So, the correct answer is C) 1, 2 and 3.
MO
Mozell
1 year ago
I agree, the volatility of the firm's assets, risk free rate, and maturity of the debt all contribute to increased credit risk.
CR
Cruz
1 year ago
I think the correct answer is C) 1, 2 and 3. Under the contingent claims approach, all three factors increase the risk of credit default.
HA
Hayley
2 years ago
So, the answer must be B) 1 and 3 then.
RO
Rodrigo
2 years ago
I agree with Raylene, but I also think risk increases when maturity of the debt increases.
RA
Raylene
2 years ago
I think risk increases when volatility of the firm's assets increases.