Income-based valuation: Income-based valuation focuses on finding the fair value of the company, depending on the future cash flows. The key of income-based valuation is future cash flows that a company will generate. The value of a company then, is the sum of present value of its future net cash flows. Calculation of future cash flows is not an easy task, though. It includes long-term business plans, growth plans, and risks associated with future cash flows. After calculating net cash flows, they are discounted at an appropriate discount rate.

The Basel Committee permits banks to choose between two broad methodologies for calculating their risk-based capital requirements for credit risk:

Standardized approach and the internal ratings-based (IRB) approach.

Offshoring: The moving of various operations of a company to another country for reasons such as lower labor costs or more favorable economic conditions in that other country.

With the enhancement of the Basel-II, the Basel Committee added a new class of risk into the calculation of risk-based capital charges. The Committee defined the operational risk as the “risk of loss resulting from inadequate or failed internal processes, people and systems or from external events”. 

This definition includes human error, fraud and malice, failures of information systems, problems related to personnel management, commercial disputes, accidents, fires, and floods. In other words, its scope seems so wide that, with no significant prior data available to extract a meaningful and accurate risk profile, the practical application is difficult to immediately perceive.

The correct answer is D.

Cross-border M&A is a form of business combination between two firms in two different countries. The correct answer is A.

Liquidity, frequently overlooked by financial institutions, may bring substantial losses in a very short period of time. The most profitable financial instruments tend to be illiquid assets. Assets carrying the illiquidity premium are rewarded with substantial profits in good times, however, when the tide turns, such assets may rapidly deplete a bank’s resources.

The literature on risk management has grown exponentially in the last two decades. The milestones are the 1988 regulation on capital adequacy by the Basel Committee, the release of RiskMetricsTM Technical Document by JP Morgan in 1994, and the release of Basel-II by the Basel Committee in 2000. The correct answer is A.

Anergy refers to a condition of joining two separate firms producing an outcome that is less than the sum of separate entities.

there are no taxes and transaction costs so C is not correct