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business
principles of risk management
Questions and Answers of
Principles Of Risk Management
Explain the rationale behind the return factor and the time-variance factor.
How can a real options approach support corporate risk management?
Explain the underlying idea behind the real options perspective.
Outline the formal risk management process and list approaches to deal with the diverse risk exposures.
What can corporate management do in response to the new competitive environment?
Explain how the external competitive environment is changing.
Outline major types of real options structures in a corporate context.
Outline the major differences between financial and real options.
Explain how the strategic management process implicitly deals with risk exposures.
What is the potential significance of the duration gap of corporate equity?
Explain how the duration gap of the corporation’s implied equity position can be determined.
List different types of exposure and discuss how associated risk factors may affect corporate performance.
to 2.6, and determine the notional principal of the swap.(b) Should we go long or short the swap?
and average duration of 5.2. The five-year swap is quoted as 6.10–6.20 and has a duration of 3.6.(a) Use the swap market to set up a hedge that reduces the duration of the portfolio from
You are managing a US$243 500 000 nominal bond portfolio with average price of
A German institution has a four-year US dollar-denominated bank loan paying six-month LIBOR + 11/8%. The fixed euro–floating rate US dollar interest rate and currency swap is quoted at 4.55–4.67.
An investor has a five-year portfolio of US dollar-denominated floating rate notes paying six-month LIBOR + 7/8%. The five-year fixed–floating interest rate swap is quoted at 0.45–0.55 and the
A company has a three-year US dollar-denominated loan at six-month LIBOR plus 1/2% p.a. The three-year fixed-floating interest rate swap is quoted at 0.70–0.80 and the yield on the three-year
How does a generic risk swap work and how can it help manage risk exposures?
How does an asset swap swap work and how can it help manage credit exposures?
How does a credit spread swap work and how can it help manage credit exposures?
Explain the underlying rationale behind the formation of credit swaps.
Explain how interest rate swaps can help manage a corporate interest rate risk exposure.
Explain how interest rate swaps can help in fine-tuning the duration of a loan portfolio.
Explain how interest rate swaps can help in fine-tuning the duration of an invested portfolio.
When can a currency and interest rate swap be useful to a hedger?
Explain the mechanics of a combined currency and interest rate swap.
What is the idea behind an interest rate basis swap?
Explain how interest rate swaps can help manage the interest rate risk of an investor.
Explain how interest rate swaps can help manage the interest rate risk of a borrower.
Why might anyone want to establish a ratio-ed straddle position?
Explain the underlying rationale of a delta hedge.
When might it be interesting to engage in a ratio call spread and a ratio put spread?
How can we establish a butterfly spread and an inverse butterfly spread?
What is the difference between a straddle and a strangle position and a straddle and an inverse straddle?
Explain the rationales behind the double option positions called a vertical bull spread and a vertical bear spread and propose situation where they might be appropriate.
Explain the advantages associated with the use of currency option contracts as opposed to currency futures contracts to hedge currency positions.
What are ceiling rate agreements and floor rate agreements and how are they used?
Explain how a borrower and an investor respectively can use forward rate agreements (FRAs) to hedge the interest rate risk.
Explain how we can determine the interest rate sensitivity of a institutional equity position.
Explain how you could use futures contracts to manage interest rate risk(duration).
Explain how zero-cost cylinders can be used to hedge foreign exchange receivables and payables.
Explain the principle behind currency hedges for foreign exchange receivable and payables.
What is the idea behind the concept of immunization?
What determines how many futures contracts should be traded?
Explain how bond futures are priced and settled.
Explain the principle behind long-term interest rate hedges for a borrower and an investor.
Explain how the interest rate futures are priced and settled.
Explain the principle behind short-term interest rate hedges for a borrower and an investor.
The fixed-rate leg of a five-year US dollar interest rate swap with semi-annual settlement dates has a duration of 3.7. Please determine the duration of the five-year interest rate swap.
A US-based investor has acquired a portfolio of five-year Swiss franc Eurobonds with a nominal value of 50 million and a yield of 4.35% (semiannual bond basis). Given a five-year Swiss franc swap
Based on the quotes provided in Figure 6.5, determine at which spread over LIBOR a UK-based borrower can convert the interest expense on a ten-year fixed-coupon corporate bond that currently yields
The current spot foreign exchange rate is quoted at 1.1150 US$/A. The tenyear US treasury bond yields 5.35% and the yield on the corresponding German bund is 5.05%. Based on this information, please
are quoted for semi-annual settlement periods and the treasury yields are quoted on semi-annual interest rate bond basis. Please convert the two indicative fixed rates determined above into a
and
The interest rate swaps in
A corporate borrower has drawn down a US dollar-denominated three-year floating rate credit facility that charges LIBOR + 11/4%. The three-year US dollar interest rate swap is quoted at 0.70–0.80
An institutional investor has a five-year portfolio of US dollar-denominated FRNs with average returns of LIBOR + 3/4%. The current five-year US dollar interest rate swap quote is 0.65–0.75 and the
Explain the overall risk effects of credit swaps, risk swaps, risk-linked securities, and other types of hybrid instruments.
Provide at least one example of an exotic swap structure created through the combination of a swap and some other derivative instrument.
Explain the difference between a credit default swap and a credit spread swap.
Explain the mechanics of a credit default swap.
Explain how interest rate swaps can be used to manage an interest rate gap defined by its duration.
Explain how a potential corporate borrower might use an interest rate and currency swap.
Explain when and how an institutional investor might use an interest rate swap.
Explain how a swap dealer would determine the market value of a US dollar interest rate swap.
Explain how a currency and interest rate swap in Australian dollars is quoted.
Explain how interest rate swaps in US dollars are quoted in the interbank market.
Explain the rationale behind the emergence of financial swaps in the form of interest rate swaps and currency swaps.
What is a caption?
What is an option-on-an-option?
Outline the potential advantages of ceiling and floor rate agreements.
Describe the rationale behind a cylinder option.
Explain what the gamma (Γ) of an option is and what it can be used for.
Explain what the delta (Δ) of an option is and what it can be used for.
Outline the relationship between call and put option premiums.
Explain the rationale underlying the binomial option valuation model.
Discuss the assumptions associated with the Black–Scholes framework.
Explain the rationale underlying the Black–Scholes option valuation technique.
Mention the factors that influence the value of an option and explain why.
Explain how it is possible to create a synthetic forward rate agreement.
Explain the mechanics of a forward rate agreement (FRA).
Explain the major differences between exchange traded contracts and overthe-counter agreements.
Determine the intrinsic value of a put option with a strike price of 32 when the current market price of the underlying asset is 29.
Determine the intrinsic value of a put option with a strike price of 32 when the current market price of the underlying asset is 36.
Determine the intrinsic value of a call option with a strike price of 32 when the current market price of the underlying asset is 29.
Determine the intrinsic value of a call option with a strike price of 32 when the current market price of the underlying asset is 36.
The OEX Sep. future is trading at index 101 (The OEX future has a multiplier of 100). Please calculate the underlying index value of the contract.
A fifteen-year 8% notional bond future is currently trading at 99.95. An eligible (cheapest-to-deliver) security has a conversion factor of 0.9176.Please calculate the principal amount of the futures
The current one-month eurodollar LIBOR rate is 3.25%. Please indicate the price quoted on a one-month eurodollar deposit futures contract.
A financial futures contract on euros against US dollars, with a contract denomination of A100 000, is quoted at 1.1150. Please calculate the value of eight euro contracts.
A futures contract was sold at price 76 and the current futures price is quoted at 72. If the short open futures position is closed out in today’s market, does it lead to a profit or a loss?
A futures contract was bought at price 225 and the current futures price is quoted at 223. If the long open futures position is closed out in today’s market, does it results in a profit or a loss?
Why is it potentially interesting to invest in futures and options contracts?
Explain how an option on a futures contract works.
Explain the factors that determine the price of an option.
Explain the difference between a call option and a put option.
Explain the major participants in the futures markets and what their roles are.
Explain what distinguishes forward agreements from futures contracts.
What are the roles of the futures exchange and the clearinghouse?
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