MARKET RISK MANAGEMENT

PLEASE READ THROUGH THE QUESTION, RESEARCH AND ANSWER ACCURATELY AND TIMEOUSLY

QUESTION 21

A fund manager announces that the fund's 3-month 99% VaR is 7.5% of the size of the portfolio being managed. You have an investment of R1 000 000 in the fund. How do you interpret the portfolio manager's announcement? (2)

There is a ...........?

a) 1% chance that you will lose

b) 1% chance that you will win

c) 5% change that you will lose

d) 5% chance that you will win

R..............? or more during a three-month period.

ANSWER BOTH PARTS OF THE QUESTION

QUESTION 22

A binary option pays off R165 if a stock price is greater than R65 in three months. The current stock price is R50 and its volatility is 35%. The risk-free rate is 4% and the expected return on the stock is 10%.

a) The risk-neutral probability of the payoffs (d2) is ............? (a) (2)

Enter the amount, either negative (e.g., -5.6789) or positive (e.g., 5.6789), rounded to four decimals.

b) Assume that d2 was calculated as - 1.5250 (minus 1.5250); use the tables to calculate N(-d2), and use interpolation. (2)

The probability is, therefore, ..............? (b)

Enter the four-decimal cumulative probability (e.g., 0.5832).

c) What would the value of the option be if N(-d2) were determined to be 0.1084? (2)

The value of the option is $.................? (c)

Round your answer to two decimal places (e.g., 12.23)

QUESTION 23

Explain the risks involved in annuity and life insurance contracts. (2)

QUESTION 24

What does it mean to assert that the delta of a call option is 0.65? How can a short position in 1,000 options be made delta neutral when the delta of a long position in each option is 0.65? (4)

QUESTION 25

Discuss the term implied volatility? (2)

QUESTION 26

What position is equivalent to a long forward contract to buy an asset at R100 on a certain date and a long position in a European put option to sell it for R100 on that date?(2)

QUESTION 27

Discuss how financial institutions differentiate between valuation and scenario analysis. (2)

QUESTION 28

Explain three different ways that scenarios can be generated for stress testing. (5)

QUESTION 29

How can companies manage unknown and unknowable risks? (2)

PLEASE NOTE IT IS IMPORTANT TO RESEARCH AND ANSWER CORRECTLY. IT IS VERY IMPORTANT THAT ALL THE ANSWERS ARE ANSWERED CORRECTLY.

PLEASE ANSWER QUICKLY AND DO NOT TAKE TOO LONG ON THE QUESTIONS.