Structure of Decisions
This type of decision environment exists when the decision maker knows each possible outcome and its exact probability of occurring.
What is decision under risk?/ What is risk-based decision?
This type of risk refers to the possibility that a borrower will fail to make promised payments on a debt obligation.
What is credit risk?/ What is default risk?
This form of financing requires regular interest payments and eventual repayment of principal, but does not dilute the ownership of existing shareholders.
What is debt financing?
This type of derivative contract gives the buyer the right, but not the obligation, to purchase an asset at a specified price on or before a certain date.
What is a call option?
This is the most common measure of a company's profitability, calculated as net income divided by total revenue, often expressed as a percentage.
What is net profit margin?
A visual tool that maps out sequential decisions, chance events, and final payoffs, often solved by working backward from the end.
What is a decision tree?
The risk that an asset cannot be bought or sold quickly enough in the market to prevent a loss, often measured by the bid-ask spread.
What is liquidity risk?
When a company sells its accounts receivable to a third party at a discount in exchange for immediate cash, this type of financing is being used.
What is factoring?
A standardized, exchange-traded contract that obligates the buyer to purchase an asset (or the seller to sell an asset) at a predetermined future date and price.
What is a futures contract?
The famous financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.
What is the balance sheet?
The decision rule that selects the alternative with the highest possible minimum payoff, commonly used by conservative or risk-averse managers.
What is the maximin criterion?
A U.S. company with a subsidiary in Japan faces this risk when the yen weakens against the dollar, reducing the translated value of Japanese profits.
What is translation risk (or translation exposure)?
Financial benefit, often provided by a government to businesses, industries, or individuals to reduce production costs or keep consumer prices low
What is subsidy?
This type of option gives the holder the right to sell an asset at a specified strike price before expiration, often used as downside protection.
What is a put option?
This U.S. central banking system, created in 1913, is responsible for monetary policy, supervising banks, and maintaining financial stability.
What is the Federal Reserve?
In decision theory, this is the maximum amount a decision maker would pay for perfect information, calculated as the difference between the expected value with perfect information and the expected value without it.
What is the expected value of perfect information (EVPI)?
Type of risk that is inherent, unavoidable risk affecting an entire market or economy, also known as market risk
What is systematic risk?
This type of financing is pool of capital collected from multiple investor created to meet specific investment goals, such as capital growth, regular income, or risk management.
What is a financial fund?
A privately negotiated derivative agreement between two counterparties to exchange cash flows, typically one fixed and one floating, over a specified period.
What is an interest rate swap?
The term for the practice of spreading investments across different asset classes (stocks, bonds, real estate, etc.) to reduce overall portfolio risk.
What is diversification?
This approach to structuring decisions breaks a complex problem into smaller, simpler sub-decisions arranged hierarchically, often using pairwise comparisons and consistency ratios.
What is the analytic hierarchy process (AHP)?
The risk that a counterparty to a derivatives contract will default before the final settlement, distinct from general credit risk because it includes potential future exposure.
What is counterparty credit risk
a contract allowing a business to use an asset—such as vehicles, machinery, or equipment—for a specific period without transferring ownership, acting similar to a long-term rental
What is operating lease?
The price paid by the option buyer to the option seller for the rights conveyed by the contract, which is not refundable even if the option expires unused
What is the premium?
This principle states that money available today is worth more than the same amount of money in the future due to its potential earning capacity.
What is the time value of money?