FINANCIAL MODELING TOOLS AND TECHNIQUES SEMINAR

Q1. Define the following financial modeling terms

• Business risks
• Foreign exchange risks
• Transaction risks
• Economic risks
• Translation risks Business risks: -
Business risk is defined as the possibility of occurrence of any unfavorable event that has the potential to
minimize gains and maximize loss of a business.
Economic risks:
It is the variation in the value of the business (the present value of the future cash flows) due to unexpected
changes in exchange rates.
Transaction risks:
It is a risk of an exchange rate changing between the transaction date and the subsequent settlement date,
resulting in gain or loss on the conversion. It arises primarily from imports and exports.
Foreign exchange rate risks:
Foreign exchange rates refer to transaction rates set among different currencies. This exchange rate can be
fixed, freely floating, or managed floating. As a result of one currency appreciating or depreciating over the
other, these transactions might lead to exchange rate risks.
Translation risk: -
This is where the reported performance of an overseas subsidiary in home-based currency terms is distorted
in consolidated financial statements because of a change in exchange rates.

Q2. The risk-free rate of the bank of Sierra Leone’s traded option is 6% with a variance being estimated
at 10%. Compute the value of a 6-month put option at an exercise price of Le 148; assuming the current
shares price is Le 164
Data
Risk-free rate = 6% = 0.06
Variance (S) = 10% = 0.1
Ss = 0.12 = 0.01
Time (t) = 6 months = 6/12 = 0.5
Exercise price (Pe) = Le 148
Share price (Pa) = Le 164

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