BBF315/05: Risk Management Assignment, WOU, Malaysia Explain the advantages of options over forwards and futures and As a financial consultant, recommend to your corporate

Question 1

(a) Explain the THREE (3) advantages of options over forwards and futures.

(b) As a financial consultant, recommend to your corporate customer of internal hedging strategies through leading and lagging. Prove your recommendation with an example.

Question 2

Illustrate the FIVE (5) primary methods of managing credit risk for derivatives dealers.

Question 3

You are given the following information about two assets:

The correlation coefficient between returns on assets A and B is 0.3.

Assume 252 days of trading a year.

• You have been asked to compute:
• portfolio expected return
• portfolio standard deviations
• one-day and ten-day Value at Risk (VaR)
• Interpret the result of part (a) above.

Question 4

• Describe the THREE (3) issues that a financial institution will have to consider when assessing credit risk from a single counterparty.
• Discuss how ‘credit quality’ can affect the counterparty to perform an obligation.
• Differentiate between credit ratings used by banks in relation to those used by others.

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