FRM II-CR ECU 4

anbu.edu
Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm

FRM II-CR ECU 4

Postby anbu.edu » Thu Oct 23, 2014 6:31 pm

Which of these statements is most closely associated with ‘Ring Fencing’?
Select one:
a. It is useful when a high quality firm is looking to enter into a low quality project
b. A subsidiary can be allowed to gain a higher credit rating than the parent company
c. The subsidiary can be close to bankruptcy even though the parent company is not
d. It is valid when the parent company holds only a small amount of equity interest in the
subsidiary
The correct answer is B.
The subsidiary is looking to get a higher credit rating even if the parent company is going to be
bankrupt.
The correct answer is: A subsidiary can be allowed to gain a higher credit rating than the parent
company.

I find all the statement to be some what similar... can you explain why others are wrong

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

FRM II-CR ECU 4

Postby edupristine » Fri Oct 31, 2014 10:38 am

Ring Fencing refers to the situation where a firm makes part of it's businesses a seperate entity to the rest of its business.

So, even if one of the entity is going through losses, it will not have an impact on another entity/unit of the business.

So, if a subsidiary is ring fenced from the parent company, a subsidiary can have a higher credit rating even if the parent company is into losses.


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