Individual Assignment

Module Title Risk Management

Module Code 600577

Assessment Element 100%

Module Leader Professor Youwei Li

Word Count NA

First Sit or Resit? First sit

Reassessment by resubmission or new Resubmission

assessment?
Submission Date
Please ensure that the submission date for the
main/final module assessment is set during the
assessment period*. The 2022/23 assessment period
7 May 2023
is:
• Trimester 1 – 9th January and 20th January 2023.
• Trimester 2 - 8th May and 26th May 2023. Only
interim module assessments can have
submission dates outside of this period.

*Exceptional deviations, supported by the Head of School,

may be considered

Test learning outcomes:

LO1 • Define and critically discuss uncertainty and risk.

LO2 Identify different types of underlying risk in a business context.

LO3 • Design simple hedging strategies using derivatives.

LO4 Critically discuss risk management strategies and critically evaluate

their usefulness and limitations and potential difficulties in their
introduction into an organisation's management practices.

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Assessment of Risk Management (Please answer ALL 4
questions)

Question 1

a) Discuss at least three types of foreign exchange derivatives other than

forwards and swaps and describe the circumstances in which
organizations should consider their use.
(6 marks)

b) In the context of financial markets, define a forward contract and explain

the circumstances in which it might be advisable for an organization to
enter into a forward contract.
(4 marks)

c) Discuss climate risk. Please choose a company listed on New York Stock
Exchange, NASDAQ, London Stock Exchange, or the Exchange of the
country where you come from, discuss the company’s exposure to climate
change, and critically evaluate how to manage the risk associated with
climate change.
(10 marks)

Question 2

a) Critically discuss credit rating systems, and explain how institutions and
investors use them in their credit risk management.
(4 marks)

b) Define Value at Risk. Critically discuss the advantages and

disadvantages of Value at Risk as a measure of risk. You must choose TWO
companies listed on New York Stock Exchange, NASDAQ, London Stock
Exchange, or the Exchange of the country where you come from, say Stock
A and B. Download a minimum 61 days of price data of the two companies A
and B ending February 2023. (1) What is the 99%, 5-day VaR for a 1 million
dollar (or the local currency of the selected company, be the same
henceforth) investment in stock A? (2) What is the 99%, 5-day VaR for a 1
million dollar investment in stock B? (3) What is the 99%, 5-day VaR for a 1
million dollar investment in stock A and 1 million dollar investment in stock
B? (4) What is the benefit of diversification for the 99% VaR?
(12 marks)

c) On 20 April 2020, the price of one American oil futures contract

plunged to be negative for the first time in history. Explain the reasons

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 behind this and critically discuss its implications on risk management
and investment.
(4 marks)

Question 3

a) Explain CAPM and critically evaluate its use in risk management.

(5 marks)

b) Discuss how to apply non-arbitrage argument to price a derivative

contract, use commodity and non-commodity futures contracts as
examples.
(5 marks)

c) Explain how the Black-Scholes Model can be used as a tool of risk

management.
(5 marks)

d) Discuss movements of oil prices in the last five years. Critically

evaluate how to manage the risk associated with volatile oil prices.
(5 marks)

Question 4

(40 marks)

Control of Derivatives Trading Risk in a Bank

You work for a small bank that is considering starting a derivatives trading
operation. The CEO of the bank is concerned about whether such an
operation would be excessively risky in the light of the large losses that have
been incurred by a number of institutions in the past. Write a report (which
should contain around 2,000 words) for the CEO covering the following
matters:
i) What lessons can be drawn from past derivatives problems.
ii) What quantitative measures should be used to monitor the risk of
complex derivative portfolios.

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 ===== END =====

1. Assessment criteria
o Analysing relevant information in appropriate ways;
o Seeking academic support; o Understanding the implications of both
theory and empirics; o Numerical skills as are appropriate for the level. o
Displaying capability of integrating knowledge and using it to serve the
purpose (persuasively argue for the points you are trying to make,
whatever it might be).

2. Grading descriptors
First (>=70)
✓ Direct & penetrating in answering question, drawing on wide range of
relevant evidence.
✓ Fluent, reasoned & sustained argument, with excellent use of
supporting evidence.
✓ Excellent & critical understanding of concepts of current conceptual
issues, & of current debates &/or issues in field of study.
✓ Clear evidence of critical ability & of insight, perceptiveness &
originality. Extensive & comprehensive information base.
✓ Clear evidence of familiarity with relevant literature, including recent
research literature*.
✓ Significant 'value added' to material from lectures & prescribed reading.
Upper Second (60 – 69)
✓ Direct in answering question, drawing on range of relevant evidence.
✓ Reasoned & sustained argument, with effective use of supporting
evidence.
✓ Clear understanding of concepts, of current conceptual issues, & of
current debates & or issues in the field of study.
✓ Evidence of critical ability & perhaps some evidence of insight or
perceptiveness.
✓ Wide & sound information base.
✓ Evidence of familiarity with relevant literature, including the recent
research literature*.
✓ Considerable 'value added' to material from lectures & prescribed
reading.
Lower Second (50 – 59)
✓ Answers question, drawing on limited range of relevant evidence.
✓ Some evidence of ability to develop reasoned & sustained argument,
with adequate use of supporting evidence.
✓ Understanding of concepts & conceptual issues. Limited evidence of
critical ability.
✓ Adequate information base.
✓ Evidence of awareness of relevant literature & of some of the recent
research literature*.

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 ✓ Little or limited 'value added' to material from lectures & prescribed
reading.
Third (40 – 49)
✓ Attempts to answer question, but may digress at times & may have
limited awareness of implications of question.
✓ Argument not always fully reasoned or sustained, perhaps with limited
use of supporting evidence.
✓ Limited understanding of concepts & conceptual issues.
✓ Little or no evidence of critical ability.
✓ Limited &/or shaky information base.
✓ Little awareness of relevant literature, with little or no awareness of the
recent research literature*.
✓ No significant 'value added' to
Fail (<40)
✓ Does not answer question directly, or does so with weak &/or flawed
argument.
✓ Little understanding (or misunderstanding) of concepts. ✓ Poor
information base, perhaps with factual errors.

For more information, please refer to UG Programme Handbook.

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Assessment Submission (for student information)

eSubmission is the approved method for your programme of study. You must hand in your
assessed Assignment(s), for all modules that you are taking during the 2022/23 Academic
Year using the Canvas system. Submission of a printed copy is NOT allowed. You should
submit via the Assignments menu item on the relevant module Canvas site.

Assignments must be submitted by the date and time stipulated. Deadlines will be strictly
adhered to. Students submitting late, and who do not have additional considerations
approved by the Additional Consideration Committee, will be subject to penalties for late
submission specified by the University. Please note that Saturday and Sunday are treated as
“working days” for the purposes of the late submission policy.