Tutorial Week 5 MFA3053

Group Members (KME3)

1. Syaza Nur Anati Binti Abd Khalik (1180800)

2. Nur Anis Insyirah Binti Abu Bakar (1180803)
3. Siti Najihah Binti Shamsulbahari (1180798)
4. Noraisyaamira Binti Mohd Madzlan (1180796)
5. Syazana Athirah Binti Mohd Sazeri (1180806)

Question 1

Identify risk and their impact to:

A. Shareholders
Risk and Impact:
- Not receive the percentage of profit he or she expects because financial crises and
political upheavals can influence a company’s operations.
- Apart from that, working with investment funds and experienced brokers
informed about the most liquid resources will allow shareholders to reduce their
potential losses.
- Another risk that might be faced by the shareholders is the dividend payment risk.
Though the Company has approved its dividend payment policy, payment of
dividend to Shareholders is not guaranteed and will depend on profitability of
activities, investments plans and the general financial situation.

B. Investors
Risk and Impact:
- Market Risk happen when declining in value because of economic developments
or other events that effect the entire market. There are three main types of market
risk which are equity risk, interest rate risk, and currency risk. The investor will
lose their money because of a drop in the market price of share. The investor also
losing money when there is change in the interest rate and movement in the
exchange rate.
 - The investor will face the Liquidity risk when they unable to sell their investment
at a fair price and get their money out when they want to. It will impact the
investor when the investment will be possible to sell such as in exempt market
investment. The investor needs to accept the lower price when face the liquidity
risk in investment.
- Reinvestment risk is from reinvesting principal or income at a lower interest rate.
This risk of loss will affect the investor if the interest rate drops, and they need to
reinvest the regular interest payment.
- Foreign Investment risk happen when the investor investing in the foreign market
or countries. The investor buys the foreign investment such as the shares of
companies in emerging market, so the investor will face the risk that do not exist
in that country and the investor will losing their money.
-
C. Issuer
Risk and Impact:
- Risk to the issuer or more briefly known as issuer risk will occur when the bond
issuer needs to default their obligations to pay coupons or repay the bond. This
issuer risk refers to the opportunity for the issuer of a security to default, which
investors or bond issuers holding these kinds of securities will take a loss, and it
also depends on how much they pay based on market conditions. Therefore,
before making any purchase, the bond issuer needs to do careful research about it
to determine the level of risk involved so they can be better prepared and be
informed of the decision to be made before proceeding with the purchase of the
bond. Analysts and advisors also need to play their role to offer assistance to
select the best investment products based on given situations.

Question 6:

Identify the risk faced by the originators of securities and discuss how these can be managed.

Risk Faced by The Originators:

- The risk faced by the originators of securities are including operational risk, legal
risk and shariah risk. Operational risk is occurred when the procedures or system
failed that cause the loss. Legal risk is the risk that the organization face due to the
 legal matters. For the shariah risk is where the transaction does not meet the
shariah compliant. When sukuk is dominated in foreign currency while the assets
are local, it can cause the foreign exchange to arise. On the other hand, sukuk has
to be fully regulated to ensure in order to get the benefit from them and for the
shariah risk, the sukuk need to follow the shariah requirement. For manage these
risks, the originators need to monitor the process and the procedures related to the
structure for the operational risk. In addition, to decrease the legal risk, the
originators need to determine their engagement with SPV. Furthermore, the
originators have to monitor the risk of the securities that does not transfer to the
investors and ensure the performance of the securities to minimize the legal risk.

Question 7:

Identify the risk faced by the investor and discuss how these can be managed.

Risk Faced by The Investor:

 Credit risk
 Market risk
 Operational risk
 Liquidity risk

Investor managed the risk by:

 Assessing the structure of the security and its corresponding credit quality before
investing as dependence on the rating of the credit rating agencies may not enough.
 Moreover, the investor should examine the liquidity of the instruments to mitigate the
liquidity risks. This is because, if the securities are not liquid, they should invest in
these only if their investment strategy is buy-and-hold to mitigate the risk.
 Other than that, they should monitor the quality of their investment by not only
observing the risk factors related to the securities but also the parties involved in the
process of securitisation.
 In other hand, to manage the risk by investor is by the enforceability of claims in the
case of bankruptcy of the originator.
 In addition, to avoid the realisation risk after bankruptcy in term of time and money,
should be clearly in term of the indication of the applicable law and the jurisdiction
where the bankruptcy would be enforced.