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ASC713 Finance And Risk Modelling UITM  Assignment Answer Malaysia

The ASC713 Finance and Risk Modelling course at UITM in Malaysia provides students with an understanding of how to evaluate and manage financial risks in today’s global markets. The course emphasizes the use of financial derivatives to manage risks in volatile markets. It also covers the regulatory and reporting aspects of financial risk management. Throughout the course, students will learn and apply quantitative analysis and methods to solve problems in the field of finance and risk management.

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Assignment Task 1 :discuss financial risks and its management.

Financial risks refer to the uncertainties and potential losses that can arise in financial transactions or investments. Managing financial risks is crucial for individuals, companies, and financial institutions to protect themselves from adverse events and ensure stability. Here are some key types of financial risks and methods of managing them:

  • Market Risk: Market risk arises from fluctuations in market prices, such as interest rates, exchange rates, and commodity prices. To manage market risk, techniques like diversification, hedging, and portfolio optimization can be employed. These strategies aim to spread the risk across different assets, use financial instruments to offset potential losses, and create a well-balanced investment portfolio.
  • Credit Risk: Credit risk refers to the possibility of losses due to the failure of borrowers to repay their debts. To mitigate credit risk, thorough credit assessments, credit scoring models, and credit limits can be implemented. Additionally, collateral requirements, loan covenants, and credit insurance can be utilized to protect against default.
  • Liquidity Risk: Liquidity risk occurs when there is a lack of marketability or access to cash or liquid assets. Adequate cash management, maintaining sufficient reserves, and establishing credit lines can help manage liquidity risk. Stress testing and contingency planning can also be employed to assess the impact of potential liquidity disruptions.
  • Operational Risk: Operational risk arises from internal processes, systems, and human errors. To manage operational risk, robust internal controls, regular audits, and risk mitigation measures should be in place. Employee training, process improvements, and technology upgrades can also enhance operational risk management.
  • Reputational Risk: Reputational risk stems from negative perceptions or damage to an entity’s reputation, leading to loss of trust and business opportunities. Effective communication, transparency, and ethical practices are crucial for managing reputational risk. Implementing strong corporate governance and establishing a crisis management plan can help minimize reputational damage.

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Assignment Task 2 :apply and measure the financial risks.

To apply and measure financial risks, various quantitative and qualitative methods can be utilized. Here are some common approaches:

  • Value at Risk (VaR): VaR measures the maximum potential loss within a specified confidence level over a given time horizon. It quantifies the downside risk by considering historical data, market volatility, and correlations. VaR helps assess the potential impact of financial risks and set risk limits.
  • Stress Testing: Stress testing involves simulating extreme market scenarios to assess the resilience of portfolios or financial institutions. It measures the impact of adverse events on financial positions and helps identify vulnerabilities. By applying stress tests, potential risks can be identified and mitigated.
  • Sensitivity Analysis: Sensitivity analysis examines the sensitivity of financial variables to changes in underlying factors. It helps identify the key drivers of risk and assess the impact of changes in variables such as interest rates, exchange rates, and commodity prices.
  • Scenario Analysis: Scenario analysis involves constructing and evaluating multiple scenarios to assess the impact of various events or changes in market conditions. It helps identify potential risks and provides insights into the likelihood and magnitude of potential outcomes.
  • Risk-adjusted Performance Measures: Risk-adjusted performance measures, such as the Sharpe ratio or the Treynor ratio, consider the level of risk taken to achieve returns. These measures allow for the comparison of investment performance while accounting for the associated risks.

Assignment Task 3 : apply the various methods that can be used for managing financial risks.

Several methods can be used to manage financial risks effectively. Here are some commonly employed approaches:

  • Risk Transfer: Risk transfer involves shifting the financial risk to another party, typically through insurance or hedging instruments such as derivatives. This method allows entities to protect themselves against potential losses by transferring the risk to a third party.
  • Risk Diversification: Diversification involves spreading investments across different assets or markets to reduce the impact of any single risk factor. By diversifying their portfolios, investors can lower the concentration risk and potentially increase overall returns.
  • Risk Mitigation: Risk mitigation focuses on reducing the probability or impact of risks through preventive measures. This can involve implementing robust internal controls, conducting thorough due diligence, and establishing risk management policies and procedures.
  • Risk Avoidance: Risk avoidance involves completely eliminating exposure to certain risks. For example, a company may decide not to enter a specific market or engage in certain financial transactions to avoid potential risks associated with them.
  • Risk Monitoring and Reporting: Continuous monitoring of financial risks is essential to identify any changes or emerging risks promptly. Regular risk reporting ensures that relevant stakeholders are informed about the current risk exposure and can take appropriate actions if needed.

Assignment Task 4 :discuss the financial derivatives pricing theories and methods.

Financial derivatives pricing theories and methods are essential for valuing and trading derivative instruments. Derivatives are financial contracts whose value is derived from an underlying asset or benchmark. Here are some key theories and methods used for pricing derivatives:

  1. Black-Scholes-Merton Model: The Black-Scholes-Merton model is a widely used option pricing model. It provides a framework for valuing European-style options based on factors such as the underlying asset price, strike price, time to expiration, risk-free interest rate, and volatility.
  2. Binomial Option Pricing Model: The binomial option pricing model is a discrete-time model that values options by constructing a binomial tree of possible future prices. It allows for the incorporation of multiple periods and different probabilities of up and down movements in the underlying asset price.
  3. Monte Carlo Simulation: Monte Carlo simulation involves generating a large number of random scenarios to estimate the value of derivatives. By simulating future asset price movements and applying the derivative’s payoff function, the expected value and potential risks of the derivative can be estimated.
  4. Stochastic Differential Equations: Stochastic differential equations (SDEs) provide a mathematical framework for modeling asset price movements under uncertainty. They are often used in advanced derivative pricing models, such as those involving path-dependent options or complex underlying processes.
  5. Risk-neutral Valuation: Risk-neutral valuation is a pricing approach that assumes a risk-neutral probability measure to simplify the valuation of derivatives. It allows for discounting future cash flows at the risk-free rate, making the valuation process more straightforward.

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