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Risk Management

Assessment of Risk Management (Please answer ALL 4 questions)

Question 1

a)  Discuss  at  least  three types  of foreign exchange derivatives other than forwards and swaps and describe the circumstances in which organizations should consider their use. (6 marks)

b)   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)

c)  Discuss climate risk. Please choose a company listed on New York Stock Exchange,  NASDAQ,  London Stock  Exchange,  or the  Exchange of the country where you come from, discuss the company’s exposure to climate change, and critically evaluate  how to  manage the  risk associated with climate change. (10 marks)

Question 2

a)       Critically discuss credit rating systems, and explain how institutions and investors use them in their credit risk management. (4 marks)

b)       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 2023. (1) What is the 99%, 5-day VaR for a 1 million  dollar (or the local currency of the selected company, be the same henceforth) 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? (12 marks)

c)        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 investment. (4 marks)

Question 3

a)  Explain CAPM and critically evaluate its use in risk management. (5 marks)

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

c)  Explain how the Black-Scholes Model can be used as a tool of risk management. (5 marks)

d)  Discuss movements of oil prices in the last five years. Critically

evaluate how to manage the risk associated with volatile oil prices. (5 marks)

Question 4 (40 marks)

Control of Derivatives Trading Risk in a Bank

You work for a small bank that is considering starting a derivatives trading operation. The CEO of the bank is concerned about whether such an operation would be excessively risky in the light of the large losses that have been incurred by a number of institutions in the past.  Write a report (which    should contain around 2,000 words) for the CEO covering the following

matters:

i)         What lessons can be drawn from past derivatives problems.

ii)        What quantitative measures should be used to monitor the risk of complex derivative portfolios.