Lupane State University Building Communitise through Knueledge FACULTY OF COMMERCE DEPARTMENT OF ACCOUNTING AND FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN ACCOUNTING AND FINANCE PART IV FIRST SEMESTER EXAMINATION RISK ANALYSIS AND MANAGEMENT [COAF 4106] NOVEMBER/DECEMBER 2022 3 HOURS DURATION: INSTRUCTIONS Answer Question 2 from Section A and any THREE questions from Section 8, 2. Begin each question on a new page. 3. Please indicate the study format (Conventional/Block/Parallel) on the cover of your answer script. INFORMATION 1, Marks per question are as indicated. 2. Questions may be attempted in any order. 3. Credit will be given for showing all appropriate workings This paper consists of 7 printed pagesit. agency iil. controlling Wv. advisory v. incidental [20 marks] QUESTION 4 [20 marks] % Assessing the credit risk of small and medium size enterprises (SMEs) is one of the most challenging tasks in banking. Explore key challenges in assessing MSME credit risk In Zimbabwe. [10 marks] 5. The establishment of credit registry was a key development by the Zimbabwe government as toenhance the credit infrastructure, What are the potential benefits of the creuit reference system to the financial sector in credit risk management? [10 marks) QUESTION 5 [20 marks] 3. Discuss challenges in managing operational risks for the Zimbabwean financial sector, [20 marks} b. Explain the methods for calculating operational risk capital charges according to the Basel II Accord, [10 marks] QUESTION 6 [20 marks] a. In what ways is liquidity risk different from other financial risks? [5 marks] . Explain the role of Board of Directors in Asset and Liabilities Management. [25 marks] END OF EXAMINATION PAPER Page 5 of 7SECTION A (ComPULsoRY) QUESTION 1 [40 Marks} e 3. Over aperiod of 420 days, a portfolio worth 2WL4220 000has had an average daily return a Of return of 0.259 with a standard deviation of 0.11%, Estimations show that over the ¢ Same period there isa 3% likelihood that the portfolio might decrease by 12% over a day. Assuming the future distribution of the returns ill follow the previous pattern, calculate the 420 day value at risk for the portfolio at 97% confidence level [3 marks] b. You manage a portfolio valued at ZWLA80 S00. Previous records indicate that over a Period of 25 months, the returns on the portfolio are normally distributed with an average Of 1.25% and a standard deviation of 2WL2 550. Caleulate the value at tisk for the Portfolio over a time horizon of a month and confidence level of 99.5%. [3 Marks] & Yourclient has a portfolio of 2WL550 milion bonds consisting of A-rated bonds (32%) and Brrated bonds (28%) C- rated bonds (16%) and D- rated bonds (24%). he one-year Probabilities of default forthe bonds are A- rated: 7.5%, B- rated bonds: 4.4%, C- rated bonds: 5.7% and D - rated bonds: 4.5% and that they are independent. Ifthe recovery value for the bonds in the event of defauit Is 45%, 40%, 55% and 52% respectively, what is the one-year expected credit loss from this portfolio? [3 Marks] & Tels February 10 and a LM itd decides it will have to buy 800.000 hags of wheat in ‘August of same year. The company is worried the price of wheat might significantly rise before they purchase and decides to hedge against price increases using grain futures that currently trade for delivery every month with a Gantract size.of2 thousand bags. Suppose the LM Itd decides to use September futures and the futures price on February 10 is ATGS33.75 a bag and LM Itd closes out its position on 30 September when the spot and futures prices are RTGS50.35 and RTGS48.85 per bag respectively: Calculate the total price paid for the grain. [3 Marks] © Zimbabwean producer has, on 15 February, struck a deal to supply tomatoes to a South African client worth R550 000 000 and payment would be made at the end of June The farmer is concerned with the potential volatility in the Rand value and has decided to hedge against the fallin the Rand using the June Futures contracts, Suppose each contract Page 2 of 7is for the delivery of R200 000. On 15 February the futures price is RTGS/R = 0.1696. If at end of June the futures and spot prices are RTGS/R = 0.1466 and RTGS/R = 0.1126 Fespectively, calculate the effective price obtained by the farmer. [3 Marks] futures price is 1230. Show the hedged position at the end of three months. [5 Marks] LM Itd has accessed a 4 year loan from a bank against its assets currently valued at $450 500. The loan is the only debt in the capital structure of the company and the current Treasury bill rate is 12.5%, Standard deviation (o] = 33% and the leverage ratio (LR) = 67%, The bank is concerned about the possibility of credit loss a5 a result of default by the company and consequently decides to buy a put on the assets of the company. How much will the bank have to pay in order to elirninate credit risk? [5 Marks] {tis now late January and LM Bank is planning to invest $65 500 000 in 90 day bank bills in 3 months’ time. The bank is concerned that the yields might fall and has decided to Protect the return on its investment by hedging using 90 day bank bill futures, At end of January, the June bank bill futures contract is trading at 90.51 and the bank bill yields are 9.49%. What would be the outcome of the hedge ifin late April the bank yields have fallen £0 6.70%, and the June bank bill futures contract is trading at 93.40? [5 marks] Suppose itis 10 January and the company has 45 million dollars bank loan at 5.5% above the 3 month deposit rate with quarterly rollovers. The next roll over date is a month's time and the interest rate is expected to be higher hence the company decides to hedge by selling interest rate futures contracts. Current deposit rates are 15% and will be 16.2% in March. Show the company’s hedged position. [4 Marks) Suppose a bank has the following exposure; rate sensitive assets (RSAs) = $183 000 000 and rate sensitive liabilities (RSLs) = $181 000 000 and that rates rise by 1.7 percent on Page 3 of 7SECTION B (ANSWER ANY THREE QUESTIONS IN THIS SECTION) QUESTION 2 [20 marks] [3 marks] [6 marks] 3 In your view, does Risk Management 'mprove Firm Performance? Justify your response. stakeholders in an organisation's risk ‘management activities; i. principal Page 4 of 7Standard Normal Probabilities Table entry for zfs the area under the standard Normal curve z to the left of z, Page 6 of 7Formulae inff2)+ (ra )or 1 d= ow In(Vo/F) + fe tho? _ In(Vo/Fe-") + 4 g2y ~ oVT ~ oVT y= dy — VF 2 ©= Soe TN (dy) — Ke*TN (dz) 3. P= KETN(-da) - Soe ‘TN(-d:) 4 60+PO= Fer 2 Po = —N(-dy)Vy + Feo N(~d,) oe TNs) ~ Ke“TN (dy) 7. P= KeTN(-d) - SceTtN(-d) gis2ne 9 Ect) = SM Eli) «CB, «A = Zia Pi + CBr + (1—f) vl 40. VAR (Hic) = (u-R*)Vp =-aavy 1 in are™/yy ' & Aer! = - 5 Page 7 of 7 WIS