DFM 10
FINANCIAL RISK MANAGEMENT
Assignment – I
Assignment
Code: 2016DFM10A1 Last Date
of Submission: 26th May 2016
Maximum Marks: 100
Section-A
Each question
carries 25 Marks.
Q1. (a)
Hedging is one of the tools of
risk management under Derivatives. Briefly explain the
term hedging and state its objectives. (10 marks)
(b) The aim of margin
money is to minimise the risk of fault by either counterparty. Briefly explain
the term margin money and following types of margin
(i) Initial margin (ii) Variation margin
(iii) Maintenance margin (iv) Additional margin. (15 marks)
Q2. (a)
What do you mean by the term
corporate risk management and briefly explain its
components? (10
marks)
(b) The risk
management process consist of a series of activities that, when undertaken in
sequence, enable continual improvement in decision making. Briefly explain the
steps of risk management process. (15 marks)
Section-B (50 Marks): Case Study
American
Airlines is trying to decide how to go about hedging SFr70 million in ticket
sales receivable in 180 days. Suppose it
faces the following exchange and interest rates.
Spot rate: $0.6433-42/SFr
Forward rate (180 days): $0.6578-99/SFr
SFr 180-day interest rate (annualized): 4.01%-3.97%
U.S. dollar 180-day interest rate (annualized): 8.01%-7.98%
Required:
a. What is the hedged value of American's ticket
sales using a forward market hedge? (10
marks)
b. What
is the hedged value of American's ticket sales using a money market hedge?
Assume the first interest rate is the rate
at which money can be borrowed and the second one the rate at which it can be
lent. (15 marks)
c. Which hedge is less expensive? (15
marks)
d. Is there an arbitrage opportunity here? (10 marks)
DFM 10
FINANCIAL RISK MANAGEMENT
Assignment – I
Assignment
Code: 2016DFM10A2 Last Date
of Submission: 26th May 2016
Maximum Marks: 100
Section-A
Each
question carries 25 Marks.
Q1. (a) What
are future contracts and briefly explain its types. (10 marks)
(b) (i) Briefly explain the term Interest
rate SWAP and its types. (10
marks)
(ii) What
are the uses of interest rate SWAPs. (5marks)
Q2. (a) Legal
risk do not arise in vacuum, but owe their origin either to business loopholes
or to
subsequent break of the manner a product or service is offered.
Briefly explain the types of legal risk in context to the given statement. (10 marks)
(b) Pricing
of options commonly depends upon multiple factors. What are the factors for
determining option prices? (15marks)
Section-B (50 Marks): Case Study
Metal
Inc., a leading German metal processor, has scheduled a supply of 20,000 metric
tons of copper for October 1. On April 1,
copper is quoted on the London Metals Exchange at £562 per metric ton for immediate
delivery and £605 per metric ton for delivery on October 1. Monthly storage
costs are £10 for a metric ton in London and
DM 30 in Hamburg, payable on the first day of storage.
Exchange
rate quotations are as follows: The pound is worth DM 3.61 on April 1 and is
selling at a 6.3% annual discount. The opportunity cost of capital for Metal
Inc. is estimated at 8% annually, and the pound
sterling is expected to depreciate at a yearly rate of 6.3% throughout the next
12 months.
Required:
Compute the
DM cost for Metal Inc.on April 1 of the following options:
a. Buy 20,000 metric tons of copper on
April 1 and store it in London until October 1. (10
marks)
b. Buy
a forward contract of 20,000 metric tons on April 1, for delivery in six
months. Cover sterling debt by purchasing
forward pounds on April 1. (15
marks)
c. Buy 20,000 metric tons of copper on
October 1.
(10 marks)
d. Can you identify other options
available to Metal Inc.? Which one would you recommend?
(15 marks)
No comments:
Post a Comment