Explanation:
Deterministic cash flows are defined by their predictability both in terms of timing and amount. That’s why they’re termed "deterministic" – they’re determined and known in advance.
A is incorrect. This statement describes stochastic cash flows, not deterministic ones. Stochastic cash flows are uncertain both in terms of when they will occur and in what amount.
C is incorrect. This statement is a mix of characteristics. While it correctly states that deterministic cash flows occur at predictable times, it incorrectly states that their amounts cannot be predicted.
D is incorrect. This again describes stochastic cash flows. Deterministic cash flows are, by definition, predictable in both timing and amount.
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Q.3921 In the field of financial risk management, cash flows are often categorized into deterministic and stochastic types, each with distinct characteristics. During a group discussion for their Financial Risk Management (FRM) exam preparation, four students presented their understanding of deterministic cash flows. Which of the following statements accurately represents the characteristics of deterministic cash flows?
A
Deterministic cash flows manifest themselves at some random instants in the future, and their amount cannot be fully determined
B
Deterministic cash flows occur at future instants that are predictable and occur in an amount known with certainty
C
Deterministic cash flows amount cannot be predicted, and they occur at future instants that are predictable.
D
Deterministic cash flows are unpredictable, both in amount and time perspective.
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