600577: Assessment of Risk Management – Assessment Solution

Assessment of Risk Management

 

 Test learning outcomes: 

 

Assessment of Risk Management (Please answer ALL 4 questions)

 

Question 1

1. In the context of financial markets, define a forward contract and explain the circumstances in which it might be advisable for an organization to enter into a forward contract. (4 marks)
2. Discuss at least three types of interest rate derivatives other than swaps and describe the circumstances in which organizations should consider their (4marks)
3. Explain CAPM and critically evaluate its use in risk management. Explain the difference between the systematic risk and the non-systematic risk of an investment portfolio and discuss the extent to which diversification can reduce the risk of a
4. Explain the various potential uses of interest rate (6 marks)

Question 2

 

1. Explain how banks use internal credit rating systems in their credit risk (4 marks)

Define Value at Risk. Critically discuss the advantages and disadvantages of Value at Risk as a measure of risk. You must choose TWO companies listed on New York Stock Exchange, NASDAQ, London Stock Exchange, or the Exchange of the country where you come from, say Stock A and B. Download a minimum 61 days of price data of the two companies A and B ending February 2022.

(1) What is the 99%, 5-day VaR for a 1 million dollar investment in stock A? (2) What is the 99%, 5-day VaR for a 1 million dollar investment in stock B? (3) What is the 99%, 5-day VaR for a 1 million dollar investment in stock A and 1 million dollar investment in stock B? (4) What is the benefit of diversification for the 99% VaR? (8 marks)

1. On 20 April 2020, the price of one American oil futures contract plunged to be negative for the first time in history. Explain the reasons behind this and critically discuss its implications on risk management and (5 marks)

Question 3

 

1. Explain how the Black-Scholes Model can be used as a tool of risk Critically discuss the usefulness of Delta hedging and at least two other Greek letters in risk management. (6 marks)

1. Discuss how to apply non-arbitrage argument to price a derivative contract, use commodity and non-commodity futures contracts as (5 marks)

1. Discuss the US stock market turmoil during March and April 2020, critically evaluate how to manage the risk associated with such (6 marks)

Question 4

 

You have just been appointed as the Financial Director of a large international construction company which is undertaking major projects in a number of countries. The CEO is also new and has a background in construction and is not particularly knowledgeable about finance. He is concerned about the foreign exchange risks to which the company may be exposed.

1. As the Financial Director, you are requested to write a briefing report for the CEO explaining:

• What foreign exchange risks that company may be exposed, and what business activities can be modified to reduce these (12 marks)

• What financial instruments can be used to reduce these risks? In your report you should give priority to outlining the most fundamental and important financial instruments used for this purpose. (13 marks)

1. One of the best friends of the CEO works for a large investment bank. He has advised the CEO that the best way to mitigate any foreign exchange risks facing the company is by extensively using advanced  He particularly has advocated the use of Barrier Options, Asian Options and Compound Options. He says Swaps and Forwards are old fashioned and outdated. He further states that his bank is a leader in the area of advanced derivatives and can implement a suitable programme for reasonable ongoing fees. As the Financial Director, you are requested to write a note to the CEO with the following content:

• A concise explanation of the operation, purpose, and differences of Barrier Options, Asian Options and Compound (12 marks)

• A critical evaluation of the comments of the banker discussing whether it appropriate to follow his advice. (12 marks)

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1.   Assessment criteria

• Analysing relevant information in appropriate ways;
• Seeking academic support;
• Understanding the implications of both theory and empirics;
• Numerical skills as are appropriate for the
• Displaying capability of integrating knowledge and using it to serve the purpose (persuasively argue for the points you are trying to make, whatever it might be).

2.   Grading descriptors

First (>=70)

• Direct & penetrating in answering question, drawing on wide range of relevant
• Fluent, reasoned & sustained argument, with excellent use of supporting
• Excellent & critical understanding of concepts of current conceptual issues, & of current debates &/or issues in field of
• Clear evidence of critical ability & of insight, perceptiveness & Extensive & comprehensive information base.
• Clear evidence of familiarity with relevant literature, including recent research literature*.
• Significant ‘value added’ to material from lectures & prescribed Upper Second (60 – 69)
• Direct in answering question, drawing on range of relevant
• Reasoned & sustained argument, with effective use of supporting
• Clear understanding of concepts, of current conceptual issues, & of current debates & or issues in the field of
• Evidence of critical ability & perhaps some evidence of insight or
• Wide & sound information base.
• Evidence of familiarity with relevant literature, including the recent research literature*.
• Considerable ‘value added’ to material from lectures & prescribed

Lower Second (50 – 59)

• Answers question, drawing on limited range of relevant
• Some evidence of ability to develop reasoned & sustained argument, with adequate use of supporting
• Understanding of concepts & conceptual issues. Limited evidence of critical ability.
• Adequate information
• Evidence of awareness of relevant literature & of some of the recent research literature*.
• Little or limited ‘value added’ to material from lectures & prescribed

Third (40 – 49)

• Attempts to answer question, but may digress at times & may have limited awareness of implications of

• Argument not always fully reasoned or sustained, perhaps with limited use of supporting
• Limited understanding of concepts & conceptual
• Little or no evidence of critical
• Limited &/or shaky information
• Little awareness of relevant literature, with little or no awareness of the recent research literature*.
• No significant ‘value added’ to Fail (<40)
• Does not answer question directly, or does so with weak &/or flawed
• Little understanding (or misunderstanding) of
• Poor information base, perhaps with factual

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