QUESTION 1 AIG did not use risk clustering to visualize risk. Hampton postulates

Question

QUESTION 1 AIG did not use risk clustering to visualize risk. Hampton postulates that if they had clustered and visualized risk, the CEO could have seen the risk that credit default swaps posed to the entire enterprise. True False

QUESTION 2 When risk clusters are integrated into ERM, risk owners can visualize the important interactions between risks and their connection to the company’s various objectives. True False

QUESTION 3 When risk clusters are integrated into a firm’s ERM system, the starting point becomes the highest level exposure. Subrisks are those risk that feed into the higher level of risk exposure. True False

QUESTION 4 Once a company files for a Chapter 11 bankruptcy, a committee composed of members of the SEC and creditors design a reorganization plan that must be approved by creditors before it is executed. True False

QUESTION 5 Once a company files for a Chapter 11 bankruptcy its common stock can no longer be traded. True False

Explanation / Answer

Q1: True

Q2: True

Q3: True

Q1, Q2 and Q3 are true since Risk Clustering and ERM will help the management to foresee risks and take decision on time based on the intensity and nature of risks. Risk clusters will help the management to understand the consequences that are caused due to the expected risks. Further an ERM is a software solutions to foresee risks. This will aid the management to act proactively and begin with end in mind.

Q4: False

Q5: False

Q4 and Q5 are false since Chapter 11 bankruptcy will not restrict the company from trading its common stock on exchanges since only chapter 7 bankruptcy filing will freeze the entire operations of the company. Chapter 11 will give an opportunity for the company to revice back from bankruptcy. Once a Chapter 11 bankruptcy is filed, a committee composed of members of SEC will be appointed to design a re-organisation plan and it is necessary that the creditors are aware of the re-organization plan before being submitted to the bankruptcy court. But even if the creditors dont approve the plan, but the court feels that the plan would be benficial then the court has powers to implement the same.

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