Managing Financial Risk Multiple Choice - Answer Sheet

1. Using options and futures to reduce risk is called hedging.

2. To reduce exposure to any single asset, companies use diversification.

3. The risk of a borrower defaulting on their loan is called credit risk.

4. When prices in the market fluctuate rapidly, this is known as volatility.

5. The ability to convert assets into cash quickly is known as liquidity.

6. Derivatives are financial contracts that derive their value from underlying assets.

7. Companies must ensure they meet all legal obligations through compliance.

8. Diversification involves spreading investments across different sectors to reduce risk.