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Assignment Template

Module Title Risk Management

Module Code 600577

Assessment Element Assignment, 100%

Module Leader Professor Youwei Li

Word Count NA

First Sit or Resit? First

Reassessment by resubmission or new assessment?

Resubmission

Submission Date Please ensure that the submission date for the main/final module assessment is set during the assessment period. The 2021/22 assessment period is:

 Trimester 1 – 10th January and 21st January

2022.

 Trimester 2 – 9th May and 27th May 2022. Only interim module assessments can have submission dates outside of this period.

18 May 2022

Test learning outcomes:

LO1  Define and critically discuss uncertainty and risk.

LO2 Identify different types of underlying risk in a business context.

LO3  Design simple hedging strategies using derivatives.

LO4 Critically discuss risk management strategies and critically evaluate their usefulness and limitations and potential difficulties in their introduction into an organisation's management practices.

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Assessment of Risk Management (Please answer ALL 4 questions) Question 1

a) 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)

b) Discuss at least three types of interest rate derivatives other than swaps and

describe the circumstances in which organizations should consider their

use.

(4marks)

c) 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 portfolio.

(6 marks)

d) Explain the various potential uses of interest rate swaps.

(3 marks) Question 2

a) Explain how banks use internal credit rating systems 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 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)

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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.

(5 marks)

Question 3

a) Explain how the Black-Scholes Model can be used as a tool of risk

management. Critically discuss the usefulness of Delta hedging and at least two other Greek letters in risk management.

(6 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) Discuss the US stock market turmoil during March and April 2020,

critically evaluate how to manage the risk associated with such events. (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. a) As the Financial Director, you are requested to write a briefing report for the CEO explaining: 1) What foreign exchange risks that company may be exposed, and what business activities can be modified to reduce these risks.

(12 marks) 2) 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) b) 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 derivatives. He

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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: 1) A concise explanation of the operation, purpose, and differences of Barrier Options, Asian Options and Compound Options.

(12 marks) 2) 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 o Analysing relevant information in appropriate ways; o Seeking academic support; o Understanding the implications of both theory and empirics; o Numerical skills as are appropriate for the level. o 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 evidence.

 Fluent, reasoned & sustained argument, with excellent use of supporting evidence.

 Excellent & critical understanding of concepts of current conceptual issues, & of current debates &/or issues in field of study.

 Clear evidence of critical ability & of insight, perceptiveness & originality. Extensive & comprehensive information base.

 Clear evidence of familiarity with relevant literature, including recent research literature*.

 Significant 'value added' to material from lectures & prescribed reading. Upper Second (60 – 69)

 Direct in answering question, drawing on range of relevant evidence.  Reasoned & sustained argument, with effective use of supporting

evidence.  Clear understanding of concepts, of current conceptual issues, & of

current debates & or issues in the field of study.  Evidence of critical ability & perhaps some evidence of insight or

perceptiveness.  Wide & sound information base.  Evidence of familiarity with relevant literature, including the recent

research literature*.  Considerable 'value added' to material from lectures & prescribed

reading. Lower Second (50 – 59)

 Answers question, drawing on limited range of relevant evidence.  Some evidence of ability to develop reasoned & sustained

argument, with adequate use of supporting evidence.  Understanding of concepts & conceptual issues. Limited evidence

of critical ability.  Adequate information base.  Evidence of awareness of relevant literature & of some of the recent

research literature*.  Little or limited 'value added' to material from lectures & prescribed

reading. Third (40 – 49)

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

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 Argument not always fully reasoned or sustained, perhaps with limited use of supporting evidence.

 Limited understanding of concepts & conceptual issues.  Little or no evidence of critical ability.  Limited &/or shaky information base.  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 argument.

 Little understanding (or misunderstanding) of concepts.  Poor information base, perhaps with factual errors.

For more information, please refer to UG Programme Handbook.

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Assessment Submission (for student information) eSubmission is the approved method for your programme of study. You must hand in your assessed Assignment(s), for all modules that you are taking during the 2021/22 Academic Year using the Canvas system. Submission of a printed copy is NOT allowed. You should submit via the Assignments menu item on the relevant module Canvas site. Assignments must be submitted by the date and time stipulated. Deadlines will be strictly adhered to. Students submitting late, and who do not have mitigating circumstances approved by the Mitigating Circumstances Panel, will be subject to penalties for late submission specified by the University. Please note that Saturday and Sunday are treated as “working days” for the purposes of the late submission policy.