MSc. ACCOUNTING AND FINANCE MFA 564: ENTERPRISE RISK MANAGEMENT ASSIGNMENT TWO ASSIGNMENT TWO MINI CASE STUDY AND PROBLEM SOLVING ON HEGDING AND FINANCIAL ENGINEERING PRODUCTS INDIVIDUAL ACTIVITY. ANSWER ALL THE QUESTIONS BELOW. TOTAL MARKS-30 1. Compute the Value-at-Risk (VaR) of a six-month forward contract. The transaction requires the investor to deliver $12.7 million in 180 days and receive 610 million in exchange. Assume that the current spot rate is $1.26/1 and the annualized interest rate is 4% on a six-month zero coupon bond and 3% on a six-month zero coupon Euro bond Again, assume the variance/co-variance matrix (on daily returns) across those instruments are as follows: Six-Month $ Bond Six-Month $ Bond Six-Month $ Bond Slx-Month $ Bond 0.0000314 Six-Month Bond 0.0000043 0.0000260 Spot S/C Rates 0.0000012 0.0000013 0.0000032 (a) Compute the value of the short position in the zero coupon dollar bond. (2 marks) (b) Compute the value of the long position in the zero coupon euro bond in terms). holding spot rate fixed. 12. Marks) (c) Compute the VaR for this forward Contract. 12. Marks) (d) Compute the daily VaR for this forward contract assuming returns are normally distributed with a 90% confidential interval (4 Marks) 2. Consider the table below. Fill in the blank spaces with the reaction of the puts and calls to an increase in the variables in the left-hand column. (5 Marks) Increase in Put Call Interest rate Share Price Volatility Exercise Price Time-to-Maturity 3. Assume all Assets on the ABC Bank Balance Sheet as at 2018 are risk weighted. (GHS) 7,000,000.00 Current Liabilities 6,000,000.00 Current Assets 3,000,000.00 2,000,000.00 Long Term Liabilities Long Term Assets Owners Equity: Shares sold 800,000.00 Undisclosed Revaluation 800,000.00 Buildings 400,000.00 Total Assets 10,000,000.00 Total Assets 10,000,000.00 (a) Compute the Risk-Weighted-Capital Ratio (b) Compute Liquidity Cover Ratio (LCR) (c) Compute the Leverage Ratio (d) Compute the working Capital (e) Compute the Capital Asset Ratio (CAR) (2 Marks) (2 Marks) (2 Marks) (2 Marks) (2 Marks) 4. An Australia based company takes a US$1 million f variable rate loan in the United Kingdom at LIBOR + 2% (a) Identify the risks on this financial transaction (derivative) (1.5 Marks) (b) Identify possible ways to manage the associated risk (1.5 Marks) (c) Describe ways to hedge FX risk only (1 Mark) (d) Describe ways to hedge both IRR and FX risks. (1 Mark) Important assignment instructions In terms of structure, presentation and style you are normally required to use: ABS preferred Microsoft Word settings o Author date style APA referencing (which Includes in-text citations plus a reference list). All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles. . Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your assignment word length is beyond the allowed tolerance level. Also, ensure to send only a Microsoft Word format of the assignment. Assignment submission All assignments must be submitted by 10.00pm on 25 June 2020. All assignments must be submitted through the msc@abs.edu.gh email account MSc. ACCOUNTING AND FINANCE MFA 564: ENTERPRISE RISK MANAGEMENT ASSIGNMENT TWO ASSIGNMENT TWO MINI CASE STUDY AND PROBLEM SOLVING ON HEGDING AND FINANCIAL ENGINEERING PRODUCTS INDIVIDUAL ACTIVITY. ANSWER ALL THE QUESTIONS BELOW. TOTAL MARKS-30 1. Compute the Value-at-Risk (VaR) of a six-month forward contract. The transaction requires the investor to deliver $12.7 million in 180 days and receive 610 million in exchange. Assume that the current spot rate is $1.26/1 and the annualized interest rate is 4% on a six-month zero coupon bond and 3% on a six-month zero coupon Euro bond Again, assume the variance/co-variance matrix (on daily returns) across those instruments are as follows: Six-Month $ Bond Six-Month $ Bond Six-Month $ Bond Slx-Month $ Bond 0.0000314 Six-Month Bond 0.0000043 0.0000260 Spot S/C Rates 0.0000012 0.0000013 0.0000032 (a) Compute the value of the short position in the zero coupon dollar bond. (2 marks) (b) Compute the value of the long position in the zero coupon euro bond in terms). holding spot rate fixed. 12. Marks) (c) Compute the VaR for this forward Contract. 12. Marks) (d) Compute the daily VaR for this forward contract assuming returns are normally distributed with a 90% confidential interval (4 Marks) 2. Consider the table below. Fill in the blank spaces with the reaction of the puts and calls to an increase in the variables in the left-hand column. (5 Marks) Increase in Put Call Interest rate Share Price Volatility Exercise Price Time-to-Maturity 3. Assume all Assets on the ABC Bank Balance Sheet as at 2018 are risk weighted. (GHS) 7,000,000.00 Current Liabilities 6,000,000.00 Current Assets 3,000,000.00 2,000,000.00 Long Term Liabilities Long Term Assets Owners Equity: Shares sold 800,000.00 Undisclosed Revaluation 800,000.00 Buildings 400,000.00 Total Assets 10,000,000.00 Total Assets 10,000,000.00 (a) Compute the Risk-Weighted-Capital Ratio (b) Compute Liquidity Cover Ratio (LCR) (c) Compute the Leverage Ratio (d) Compute the working Capital (e) Compute the Capital Asset Ratio (CAR) (2 Marks) (2 Marks) (2 Marks) (2 Marks) (2 Marks) 4. An Australia based company takes a US$1 million f variable rate loan in the United Kingdom at LIBOR + 2% (a) Identify the risks on this financial transaction (derivative) (1.5 Marks) (b) Identify possible ways to manage the associated risk (1.5 Marks) (c) Describe ways to hedge FX risk only (1 Mark) (d) Describe ways to hedge both IRR and FX risks. (1 Mark) Important assignment instructions In terms of structure, presentation and style you are normally required to use: ABS preferred Microsoft Word settings o Author date style APA referencing (which Includes in-text citations plus a reference list). All references must be from credible sources such as books, industry related journals, magazines, company documents and recent academic articles. . Your grade will be adversely affected if your assignment contains no/poor citations and/or reference list and if your assignment word length is beyond the allowed tolerance level. Also, ensure to send only a Microsoft Word format of the assignment. Assignment submission All assignments must be submitted by 10.00pm on 25 June 2020. All assignments must be submitted through the msc@abs.edu.gh email account
