QUESTION 1 [15 Marks]

A report issued by International Swaps And Derivatives Association, INC. on financial market shows that many corporations and firms are involved in hedging activities (ISDA, 2009, p.2). However, some institutions and academics are skeptical about the value relevance of hedging.

Required

Critically discuss the arguments for and against corporate hedging within the context of value relevance for the firm.

QUESTION 2 (10 Marks)

1. A pension fund holds GH20 million in a portfolio of shares and GH30 million in a portfolio of bonds. The daily volatility (standard deviation) of the portfolio of shares is 2% and the daily volatility of the portfolio of bonds is 1%.The coefficient of correlation between the returns of the two portfolios is 0.1. What is the value-at-risk on the total portfolio for a confidence level of 99%? [6 Marks]
2. Explain why value at risk (VaR) analysis is important in a companys risk management effort [4 Marks]

QUESTION 3 (15 Marks)

Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk. From the viewpoint of a private insurer, an insurable risk ideally should have certain characteristics.

Required

Critically discuss the main characteristics of insurable Risk