Financial Risk Manager Part 1

Explanation

Correct Answer: C

Bankruptcy risk refers to the probability that a company will become insolvent, meaning it will be unable to meet its financial obligations to its creditors and investors. This risk arises when a company's liabilities exceed its assets, and it is unable to generate sufficient cash flow to fulfill its financial commitments.

Why Other Options Are Incorrect:

Option A describes reputational risk, not bankruptcy risk. While harm to a company's brand or reputation can have financial implications, it does not directly relate to the specific concept of bankruptcy risk.

Option B describes cyber risk, which involves potential harm from cyber threats or attacks. Although cyber risks could potentially lead to financial instability and even bankruptcy if severe enough, they are not synonymous with bankruptcy risk itself.

Option D refers more closely to credit risk — the likelihood that a borrower will default on their debt obligations — rather than bankruptcy risk. While these two types of risks are related (as default can lead towards insolvency), they are distinct concepts within the field of financial management.

Key Points:

• Bankruptcy risk specifically pertains to the likelihood of a company becoming insolvent
• It involves the inability to meet financial obligations to creditors and investors
• This risk is a critical consideration for stakeholders and is a key aspect of financial risk management
• Understanding bankruptcy risk involves assessing financial health, monitoring cash flow and liabilities, and taking proactive risk mitigation measures