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Risk Management sample questions 1 | P a g e RISK MANAGEMENT SAMPLE EXAM QUESTIONS 2014 Question 1 (10 marks)You decide to acquire a 3-year bond with a Face Value of $20,500,000, a 5.15 % semi-annual coupon and a 5.51 % yield. (a)Calculate the price and modified duration of the bond. (4 Marks) (b)Use modified duration to estimate the effect on the bond’s price for a 0.76% decrease in the bond’s yield. For the party acquiring this bond, will the transaction result in the creation of an asset or a liability? (2 marks) (c)Recalculate the bond’s price directly at a yield of 4.75%. Is your price different to your estimate in part (b)? If so explain why, with the aid of a diagram. (4 Marks) Question 2 (5 marks) Alpha Corporation requires USD10 million in 3months time and is concerned about foreign exchange risk associated with the transaction. They have been advised to use a FX forward contract to hedge the risk but are unsure of the quote they have received. As the resident derivatives specialist you have been asked to provide your input. How would you create a (synthetic) forward contact as an alternative using the spot FX market and money markets in United States and Australia? (5 Marks) Question 3 [ 5 marks] Discuss the nature and purpose of derivative products. Explain and identify different types of derivative products, the risks managed by these products. Include a comment on the difference between an ETO and an OTC.
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