Risk Assessment & Underwriting Flashcards
7 cards from real CEP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Underwriting flashcards as text
A company with significant international equity plan participation faces 'FX translation risk.' This risk is BEST described as:
Answer: The risk that award values reported in local currency differ from USD-denominated plan costs
FX translation risk arises when the cost of delivering equity awards (measured in USD) differs from the value employees perceive in their local currency due to exchange rate movements.
Under ASC 718, which award type requires a Monte Carlo simulation for fair value measurement?
Answer: PSUs with a relative total shareholder return (rTSR) market condition
Market conditions such as rTSR require a Monte Carlo simulation to model the range of possible outcomes and their probabilities when determining grant-date fair value.
A CEP professional identifies that a company's equity plan contains an 'evergreen provision.' The PRIMARY governance risk of this provision is:
Answer: It automatically increases the share pool without annual shareholder approval, raising dilution concerns
Evergreen provisions automatically replenish the share pool (often as a fixed percentage of outstanding shares) without requiring shareholder approval each year, which institutional investors and proxy advisors view as a dilution risk.
Which of the following is the BEST example of 'repricing risk' in an equity compensation context?
Answer: The risk that reducing option exercise prices without shareholder approval violates stock exchange listing rules
Most stock exchange listing rules (NYSE, Nasdaq) require shareholder approval before a company can reprice underwater options, and proceeding without approval violates listing standards.
An equity plan administrator is reviewing 'liquidity risk' for a private company ESPP. This risk MOST specifically refers to:
Answer: The risk that employees cannot sell acquired shares due to the lack of a public market
In a private company, employees who purchase ESPP shares have no public market to sell them, creating liquidity risk since the shares cannot be easily converted to cash.
A company is assessing the risk of granting stock options above fair market value (premium options). The PRIMARY risk of this structure is:
Answer: Employees may never be motivated by awards that require above-market appreciation
Premium options require the stock price to rise above the inflated strike price before they have any value, making them potentially demotivating if employees view the hurdle as unachievable.
Under Regulation S-K Item 402, the PRIMARY disclosure risk for a company that underestimates the grant-date fair value of its equity awards is:
Answer: The risk of SEC enforcement for materially misleading executive compensation disclosures
Materially understating grant-date fair values in proxy statement disclosures can constitute a violation of SEC disclosure rules and expose the company to enforcement action.