EFB344 (EFB344)

Bloomburg University

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Exam (elaborations)

EFB344 Risk Management and Derivatives: 100%
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7

May 2019

2017/2018
In relation to a commercial bank, for example Suncorp, provide a relevant example of each of the following: a. Credit Risk b. Operational Risk c. Market Risk d. Liquidity Risk In relation to a commercial bank, for example Suncorp, provide a relevant example of each of the following: a. Credit Risk b. Operational Risk c. Market Risk d. Liquidity Risk Question 2 Without performing any calculations, order the following bonds in terms of their interest rate sensitivity. a. 3-year, 10% annual coup...
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EFB344 Risk Management and Derivatives: All answers Correct
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May 2019

2017/2018
Why might it be useful to assume that returns follow a particular statistical distribution when trying to think about risk? However, not all distributions are so simply summed up, so sometimes we need to think of different ways to summarise the risk of losses. If we have a random variable X that is Normally Distributed X ~ N(0, 1) with mean 0 and variance 1, what is the distribution of Y = μ σ X?. How does this enable us to make statements about any random variables with a random variable...
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EFB344 Risk Management and Derivatives : 100% Correct
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May 2019

2016/2017
a. A Finance 1 student has asked you to explain Value-at-Risk (VaR) as they think that their Finance 1 lecturer did not explain it very well. Write a brief explanation that this student might understand. The annual return distributions (distribution, mean and variance) for stock X and Y are specified as r_x~N(0.10,0.04) r_y~N(0.15,0.09) With the bare minimum of calculations (try to do them in your head), outline which stock will have the lower 1 year value-at-risk (VaR) at the 95% and 99% leve...
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Exam (elaborations)

EFB344 Risk Management and Derivatives: 100%
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7

May 2019

2016/2017
Why would I expect the VaR of my portfolio to be less than the weighted VaR of the individual assets? Outline three (3) criticisms of VaR. 1. VaR ignores the risk in the tails. That is, VaR says nothing about the losses that occur beyond the VaR. This is important as we know that these losses will happen (with a stated non-zero probability) and they will be large. As David Einhorn (2008, pp.11-12) writes “this is like an airbag that works all the time, except when you have a car accident” a...
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EFB344 Risk Management and Derivatives. 100%
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5

May 2019

2016/2017
What is the primary purpose of the daily settlement of futures contracts? Why are both the buyer and the seller of the futures contract required to establish a margin account? Why might a futures broker require the services of another futures broker when completing customer transactions in the futures market? My portfolio has a beta of 1. Let VA be the value of the portfolio and VF is the notional value of a S&P200 futures contract (F0,T x $25). If I sell V_A/V_F futures, discuss whether my por...
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Exam (elaborations)

EFB344 Risk Management and Derivatives: 100%
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8

May 2019

2017/2018
Consider an Australian dollar FRA where a company will receive a rate of 6% with annual compounding, on a principal of $100 million over 1 year. The forward rate is 5%. With this information and following the Australian FRA conventions, a. Explain whether an investor seeking to hedge a 1 year future investment would enter into the ‘receive’ or ‘pay’ side of the FRA. b. Following from a. show that the investor who hedges their future investment with the FRA would earn the FRA rate on ...
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Exam (elaborations)

EFB344 Risk Management and Derivatives: 100%
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6

May 2019

2017/2018
An investor buys a European put on a BHP share for $3. The stock price is $42 and the strike price is $40. Under what circumstances does the investor make a profit? Under what circumstances will the option be exercised? Draw a diagram showing the variation of the investor’s profit with the stock price at maturity of the option. You have just shorted 100 CBA stocks at $75.52 and want to hedge your downside risk. How can you use an options contract to hedge your downside risk? Explain why ...
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