DFM 10
FINANCIAL RISK MANAGEMENT
Assignment – I
Assignment Code: 2016DFM10B1 Last Date of Submission: 15th November 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: 2016DFM10B2 Last Date of Submission: 15th November 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)
FINANCIAL RISK MANAGEMENT
Assignment – I
Assignment Code: 2016DFM10B1 Last Date of Submission: 15th November 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: 2016DFM10B2 Last Date of Submission: 15th November 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)
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