EFB344 Risk Management and Derivatives

Tutorial W1: Introduction to Risk, Risk Management and Derivatives

Readings: Stulz (2003) Risk Management and Derivatives, pp. 22-75.

Hull et al. (2014) Fundamentals of Futures and Options, Ch. 1.

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General Questions:

Question 1

In relation to a commercial bank, for example Suncorp, provide a relevant example of each of the
following:

a. Credit Risk
b. Operational Risk
c. Market Risk
d. Liquidity Risk

Question 2

Without performing any calculations, order the following bonds in terms of their interest rate
sensitivity.

a. 3-year, 10% annual coupon

b. 3-year, 10% coupon paid semi-annually
c. 10-year,0% annual coupon
d. 10-year, 10% annual coupon

Question 3

The yield curve is currently flat at 7%. Based on the following information price a bond with annual
coupons, a face value of $100.00 with a

a. 10% coupon rate and maturity in 2 years.

b. 5% coupon rate and maturity in 2 years.
c. 10% coupon rate and maturity in 3 years.
d. Reprice them all after parallel shift in the yield curve to 8%. Comment on the price changes.

Question 4

The risk of equity returns can be measured with either standard deviation or beta. Discuss these two
measures of risk and how they relate to each other.
Question 5

Discuss two (2) reasons as to why risk management adds value.