(c) Define ‘market risk’ for Mr Allejandra and explain why Gluck and Goodman’s market risk

Question

(c) Define ‘market risk’ for Mr Allejandra and explain why Gluck and Goodman’s market risk exposure is

increased by failing to have an effective audit committee. (5 marks)

Answer 1

正确答案：
(c) Market risk
Definition of market risk
Market risks are those arising from any of the markets that a company operates in. Most common examples are those risks
from resource markets (inputs), product markets (outputs) or capital markets (finance).
[Tutorial note: markers should exercise latitude in allowing definitions of market risk. IFRS 7, for example, offers a technical
definition: ‘Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in
market prices. Market risk reflects interest rate risk, currency risk, and other price risks’.]
Why non-compliance increases market risk
The lack of a fully compliant committee structure (such as having a non-compliant audit committee) erodes investor
confidence in the general governance of a company. This will, over time, affect share price and hence company value. Low
company value will threaten existing management (possibly with good cause in the case of Gluck and Goodman) and make
the company a possible takeover target. It will also adversely affect price-earnings and hence market confidence in Gluck and
Goodman’s shares. This will make it more difficult to raise funds from the stock market.