- 10 Marks
CSME – Nov 2015 – L2 – Q1a – Risk Management and Corporate Strategy
Explains credit risk management concepts, including exposure, losses, residual risk, and appetite.
Question
The finance director of Basket Company is preparing a proposal to present to the board of directors. He believes that the company is much too cautious in its policy of giving credit to customers. At the moment all customers are given 30 days’ credit. He believes that by increasing its exposure to credit risk, and increasing credit terms to 60 days, the company will achieve an increase in annual sales of up to 20%. He also thinks that some improvements in debt collection procedures will reduce the level of bad debts, although some bad debts cannot be avoided. He thinks that the value of sales where there is a default will fall each year from 2% of sales to 1.8% of sales. He proposes that in order to increase annual sales and profits, the company should be willing to increase its risk appetite and accept the risk of higher bad debts.
Required:
- Using this example of managing credit risk, explain and illustrate the meaning of:
i. Exposure to risk
ii. Risk of losses
iii. Residual risk
iv. Risk appetite
Find Related Questions by Tags, levels, etc.
- Tags: Credit Period, Credit risk, Exposure to Risk, Residual Risk, Risk Appetite, Risk of Losses
- Level: Level 2
- Topic: Risk Management and Corporate Strategy
- Series: NOV 2015