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38 Questions on Corporate Risk Management with Answers - Exam 1 | FIN 321, Exams of Finance

University of Nevada - Las Vegas (UNLV)Finance
Prof. Thistle

Material Type: Exam; Professor: Thistle; Class: Corporate Risk Management; Subject: Finance; University: University of Nevada - Las Vegas; Term: Fall 2009;

Typology: Exams

2009/2010

Uploaded on 02/24/2010

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FIN 321 Prof. Thistle
Corporate Risk Management Fall 2009
EXAM 1
Write your name on the Scantron form and on the outside front cover of the exam
book.
Part A. Multiple Choice. (2 pts. each) Write all answers on the Scantron form.
For each question, choose the one alternative that best completes the statement or
answers the question.
1. b
2. a
3. d
4. b
5. b
6. d
7. c
8. a
9. c
10. a
11. a
12. a
13 c
14. d
15. c
16. c
17. b
18. b
19. c
20. c
pf3
pf4

Partial preview of the text

Download 38 Questions on Corporate Risk Management with Answers - Exam 1 | FIN 321 and more Exams Finance in PDF only on Docsity!

FIN 321 Prof. Thistle Corporate Risk Management Fall 2009

EXAM 1

Write your name on the Scantron form and on the outside front cover of the exam book.

Part A. Multiple Choice. (2 pts. each) Write all answers on the Scantron form. For each question, choose the one alternative that best completes the statement or answers the question.

  1. b
  2. a
  3. d
  4. b
  5. b
  6. d
  7. c
  8. a
  9. c
  10. a
  11. a
  12. a 13 c
  13. d
  14. c
  15. c
  16. b
  17. b
  18. c
  19. c

Part B: Fill-in (1 pt. each) Answer all questions in the exam book.

  1. loss control , loss financing , internal risk reduction
  2. ___a gency
  3. loss control , loss financing, internal risk reduction ,
  4. random.
  5. probability distribution
  6. __ contracting ___
  7. ___ increases ___

28 more

  1. loss reserves, unearned premium reserves.
  2. public interest
  3. economic
  4. McCarran-Ferguson Act
  5. regulatory monitoring , capital and asset restrictions , the guarantee fund system.
  1. (a) “Equity is like a call option on the firm’s assets with a strike price equal to the face value of debt.” Explain why this statement is true. (b) Why does this lead to an agency problem (conflict of interest) between shareholders and policyholders in an insurance company?

a) The basic reason is that the shareholders can choose to default on the debt. If the firm’s assets are worth less then the face value of the debt, then the shareholders choose to default. If the firm’s assets are worth more then the face value of the debt, then the shareholders choose to “buy” the assets from the debt-holders. The value of equity is then E = 0 if A < D = A - D if A > D which is the same payoff structure as a call option with an exercise price of D.

b) Shareholders can increase the value of equity by increasing the riskiness of the firm’s assets. The increased riskiness of the firm’s assets reduces the value debt.

  1. Suppose that regulators think that Shaky Insurance Company is in danger of becoming insolvent and are considering intervening. (a) What are some potential problems if regulators intervene prematurely? (b) What are some factors that might lead to regulatory forbearance against Shaky?

(a) Premature intervention may actually cause Shaky to become insolvent. Information leaks may cause policyholders to lapse their policies, discourage new business, and may increase the cost of capital to the firm, making it more difficult for Shaky to recover.

(b) Factors that might lead to unjustified regulatory forbearance include: a) weak insurers might exert substantial pressure for forbearance; b) insolvencies might make regulators appear incompetent, so that they delay taking action with the hope that the insurer’s condition will improve; or c) incompetence of regulators.