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BAFI3192 – Derivatives and Risk Management
Assessment 1 - Semester 2, 2022
*You should adhere to the word limit for each question. Failure to do so will result in a 10%-mark
penalty for every 100 words over.
Question 1 (Total 15 marks) (maximum 1,150 words)
To an extent, we understand the dynamics of financial shocks to the system. From the 1998
Southeast Asian financial crisis, to the 2008-2009 Global Financial Crisis, and the 2010 European
sovereign banking crisis, we have some experience of the effects of such events from a market
perspective. What is less clear are the effects of such shocks from an institutional perspective.
As such, you will be randomly assigned a firm from the S&P500 index. You may assume that your
firm has not experienced any adverse economic events over the life of its operation thus far. You
may also assume that you are currently working with the risk management department for said
firm. Within this role, you are required by senior management to produce a risk management
report, detailing the institutional plans in addressing any future financial crises.
Requirements:
To achieve this, senior management have set out the following tasks to be undertaken:
a) You should select a past financial crisis and conduct a thorough review of the dynamics of
this event. Within your review you should also consider institutions who have both
thrived and failed over this period. This institutional review will allow you to inform your
risk management plan about practices that have resulted in the success or failure over
this financial shock. To gain a good background knowledge to build a sound risk
management plan, it is recommended that your institutional research should focus on
companies that are the same or similar to your own firm and/or industry.
b) Using the information gathered from Task (a) above, and your firm’s specific
circumstances and profile, you should produce a risk management plan highlighting the
mechanisms and responses to such a financial shock. This risk management plan should
be for the future.
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You will present your findings in a written report. The main points to be included in your report
are as follows:
i) A brief description of your firm and the industry that it operates in, and an overview of
your chosen financial shock and its main causes/effects (note: you should only discuss the
financial shock that you wish to focus on in your research).
(3 marks)
ii) Identify companies that have thrived or failed over your chosen financial shock. You
should identify the practices adopted by both types of companies. Analyze the selected
companies, focusing on their mechanisms, characteristics, internal and external
environments that have allowed them to succeed or caused them to fail over such events.
(note: the characteristics identified in the selected company/companies can offer you
good insight for your own risk management plan. You can think about what practices you
can adopt or remove from your company in drawing up your risk management plan).
(3 marks)
iii) Based on your research conducted in part i) and ii) above, produce a risk management
plan for your own firm. Within your plan, you should highlight the mechanisms and
actions required for your firm to address the risks identified. You can summarize your risk
management plan using either a table or figure, where you can highlight whether the
actions are to be employed as regular activities under the company’s normal operating
condition as preventive measures, or to be utilized during the financial crisis, as a
responsive action. You should also consider the underlying economic costs and benefits
of establishing the risk management plan (note: For the creation of the risk management
plan, please situate your discussions within the context of your firm. Your risk
management plan and its subsequent arguments should be defined to the characteristics
of your assigned company, making reference to specific dynamics where possible.
Remember, as well, to support your discussions with the relevant academic literature and
theoretical constructs that we have covered on this course thus far).
(9 marks)
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Question 2 (Total 5 marks) (maximum 150 words)
i) You will need to acquire $1,000,000 USD using Vietnamese Dong for a transaction in three
months’ time. Assume that you need purchase this currency for a local Vietnamese bank.
Collect the USD/VND quotes from five Vietnamese banks, as well as the three-month interest
rates for both America and Vietnam, and estimate the three-month forward rates. Select and
explain which forward rate would be the best transaction. (*note: please provide all
calculations as well as the screenshot of the banks’ exchange rates. These screenshots should
be included in your report in the appendix after your references)
(2 marks)
ii) Explain the concept of arbitrage and how it creates a more efficient financial system? You
should include academic support for your arguments. You can use the data gathered in part
i) to further illustrate your arguments.
(3 marks)
Total word limit for Assessment 1: 1,300 words