Question One
Risk Management
1. Please devise a hedging strategy for Hilditch:
a. What position should it take if Hilditch wants to use crude oil futures to hedge the exposure? (300 words)
b. What is the optimal hedge ratio?
c. What is the optimal number of futures contracts with tailing of the hedge?
Question Two
(i) FIXED INCOME INVESTMENT
Tony worked for Hilton Hotels previously and ended his career on a high note, retiring as the CEO of Hilton Hotels. On the 31st December 2017, the board of directors proceeded an issue of a 10-year Hilton-Hotels corporate bonds with a coupon of 6.0% payable semi-annually and offered the chance to Tony to subscribe to it. The level of credit risk associated with the corporate bond is measured by using credit ratings given by credit rating agencies. The bond was rated by Moody’s rating agency and obtained a rating Baa3. Accordingly, Tony invested Rs10 million into the bond. While doing your research, your credit analysis team informed you that Hilton-Hotel corporate bonds may be downgraded to Ba1. He heard from a friend that he should only invest in investment grade bonds.
(a) Tony is not well versed with credit ratings. Prepare a statement to explain Moody’s credit ratings system to Tony, its importance on the international stage and the impact of a downgrade on the bond’s yields (interest rate) and credit risk. (10 Marks/ 300 words max.)
(b) Given that the bond is currently trading at a market interest rate of 4% (assume that today is the 31st December 2020 such that there are 7 years remaining till the maturity of the bond), what is the price of the bond? (5 Marks)
(c) In another scenario, market expectations point towards a cut in the Key Repo Rate (interest rate) to the tune of 50bps (0.5%) in 3 weeks’ time. Discuss whether Tony is better-off disposing of the bond immediately or should he wait for the cut in the Key Repo Rate and then sell the bond?
Question Three
Outline the risks associated with international investment. (10 Marks)
Describe the strategies that may be adopted by multinational companies with regard to country risk. (20 Marks)
Outline the risks associated with international investment. (10 Marks) Describe the strategies that may be adopted by multinational companies with regard to country risk.
Question Four
Assume b=0.05b=0.05 is a constant for all ii in the BDT model as we assumed in the video lectures. Calibrate the a_iai? parameters so that the model term-structure matches the market term-structure. Be sure that the final error returned by Solver is at most 10^ {-8}10-8. (This can be achieved by rerunning Solver multiple times if necessary, starting each time with the solution from the previous call to Solver.
Once your model has been calibrated, compute the price of a payer swaption with notional $1M that expires at time t=3t=3 with an option strike of 00. You may assume the underlying swap has a fixed rate of 3.9\%3.9% and that if the option is exercised then cash-flows take place at times t=4, \ldots , 10t=4,…,10. (The cash-flow at time t=it=i is based on the short-rate that prevailed in the previous period, i.e. the payments of the underlying swap are made in arrears.)
Submission Guideline: Give your answer rounded to the nearest integer. For example, if you compute the answer to be 10,456.67, submit 10457.
Question Five
In Question 9, would it make any difference if Schwartz’s bank had confirmed the letter of credit and paid the promissory note before Rousseau learned of the supposedly defective shipment?
Question 9
Rousseau et Fils has signed a contract to buy 10,000 “new coffee percolators in the manufacturer’s original packaging, with standard manufacturer’s warranty,” from Schwartz, GmBH. Schwartz agrees to ship the percolators CIF, and Rousseau agrees to make payment by means of an irrevocable letter of credit. Rousseau contacts Thermidor Bank, which issues a letter of credit promising to honor a promissory note payable to Schwartz when it is accompanied by an invoice and a clean, on board bill of lading for “10,000 new coffee percolators in the manufacturer’s original packaging, with standard manufacturer’s warranty.” Rousseau learns from Weiss, a competitor of Schwartz, that even though Schwartz had obtained actual bills identifying the goods as “10,000 new coffee percolators in the manufacturer’s original packaging, with standard manufacturer’s warranty,” the percolators were actually used and inoperable.
Question six
Consider a 11-period binomial model with R=1.02R=1.02, S_0 = 100S0? =100,
u=1/d= 1.05u=1/d=1.05. Compute the value of a European call option on the stock
with strike K=102K=102. The stock does not pay dividends.
Question Seven
Suppose there are two ratings categories: A and B, along with default. The ratings migration probabilities look like this for a B-rated loan:
Rating in 1-year Probability
A 0.05
B 0.90
Default 0.05
The yield on A rated loans is 5%; the yield on B rated loans is 10%. All term structures are flat (i.e. forward rates equal spot rates). A loan in default pays off 50%.
a) You have two loans in your portfolio, both are B-rated, 3-year, 10% coupon bonds
(paid annually), each with $100 face value. Compute the possible prices of the loans next year in each ratings bucket (just before the first coupon is paid).
b) Use the actual distribution and normal distributions of your positions to compute the 1-year VAR with 95% confidence for each loan.
c) Suppose the returns on the two loans have zero correlation. (This means, for example, that the probability that one loan remains B-rated and the other defaults equals the product of the marginal probabilities, or 0.90*0.05 = 0.045.) Construct the probabilities for each possible outcome of your portfolio
d) What is the 95% VAR for the whole portfolio (using both actual and normal
distributions)?
Question Eight
Task Description You are hired by Advanced Medicos Limited (AML), a healthcare product sell company, as a cybersecurity consultant to help in security management and to address the contemporary and emerging risks from the cyber threats the company is facing. AML is providing a platform for Australian customers to sell their product online. The vision of the company is to be among the top 5 nation-wide. The board from the advice by Chief Information Officer (CIO) and Chief Information Security Officer (CISO) has concluded that they should get to point that the key services such as web portal should be able to recover from major incidents in less than 20 minutes while other services can be up and running in less than 1 hour. In case of a disaster, they should be able to have the Web portal and payroll system fully functional in less than 2 days. The company is a new company which is growing rapidly. While the company uses its database server to store the information of its customers’ private data, credit card info, etc. it has a poor designed network with a low level of security. As the company is responsible for the privacy and the security of customer personal info, credit card details, the security of payment transactions, etc. they have decided to improve their information security. Therefore, they have hired you to do the following task: - Risk assessment exercise: perform a full cyber risk assessment exercise for this company and document the outcomes.
Existing IT infrastructure of AML: - Office 365 Emails Hosting - 2 Web server providing web services and payment options - A physical database server storing customer information - DHCP and DNS servers - Servers located in a server room accessible by all staff - There is no virtual/cloud storage - The backup files are stored on a single computer connected to the internal network - Two 24-port Cisco Catalyst switches (1Gbps ports) - Switches are access layer switches - ADSL router - 40 PCs with outdated antivirus - The operating systems used in the company are Windows 2012 server and Windows 10 - Windows Firewalls are on - No security configuration on routers and switches - Telnet connection is used by IT people to remotely check the configuration of the network devices. Therefore, there is no encryption in remote access. - Two wireless access points - Wireless security is WPA - 10 Voice over IP phones - Servers located in a server room accessible by all staff - There is no virtual/cloud storage - The backup files are stored on a single computer connected to the internal network - There are 40 staff including three IT people (IT staff are responsible to look after internet connection, network devices, Wi-Fi, Voice over IP service, LAN, computers, servers, hardware and software, and video conference facilities). - All staff and equipment are on a single floor. - The roles and responsibilities of people who are responsible for information security management are not clear and they are not documented. All IT staff help in information security management. For this assignment, you need to write a report to the CEO of the company and answer a number of questions. You should also identify assets, perform risk assessment, and propose solutions to mitigate risks. Your answer should be submitted in PDF/DOC files. Assignment-1 guideline Risk assessment exercise: perform a full cyber risk assessment exercise for AML and document the outcome.
Task 1: Identify and manage asset 1.1 To perform a risk assessment for this company, you should first identify all information assets and their business values. This is necessary because unidentified assets are not considered in risk assessment. In this question, you need to identify information assets based on your judgment and then perform the asset classification. You should classify information assets as different categories of assets which might need different protection based on their sensitivity and their value. Make a table for your task 1 and add the following information in your table: a. provide a list of assets (at least 10 assets should be identified) and provide a meaningful description for the assets e.g. what is it used for, and what is included etc. b. determine the asset location and ownership, assign a unique ID for the asset. Each id should give some hint about the asset. For instance, HW.01 can be interpreted as Hardware Asset number 1. c. classify the identified assets based on their sensitivity. The identified classes should be based on your understanding and experience of each asset. You need to do some research and find at least three common classes of information assets. Create a Weighting Factor Analysis (WFA) to rank the identified assets. To complete this task, you need to search for asset classification samples. The following links also give you the required information about assets classes. https://policy.usq.edu.au/documents/13931PL https://www.flinders.edu.au/content/dam/documents/staff/policies/facilities-infomanagement/information-classification-handling-procedures.pdf https://cdn-images-1.medium.com/max/1200/1*AXioKlJPercQVPvEm-tt-A.png 1.2 Explain how information security governance can help AML to have efficient asset management. 1.3 To improve the level of cybersecurity in AML, you should develop some security policies. The policies should cover different assets like people, technology, access control, etc. The links below give you some examples of information security policies. For this question, at least 5 policies should be provided. It is expected that you first create your Enterprise security or enterprise information policy. https://policies.newcastle.edu.au/document/view-current.php?id=135 https://sydney.edu.au/policies/showdoc.aspx?recnum=PDOC2011/141&RendNum=0
Task 2: Vulnerability management and risk management 2.1 Do some research about different steps of Enterprise Risk Management by ISO framework and briefly explain each step. 2.2 Identify vulnerabilities in the company assets and their threats. This information should be shown in a table called vulnerability assessment table (TVA worksheet). One extra column should be added for brief vulnerability analysis. 2.3 Now, you are responsible to develop a risk management strategy to mitigate the existing risks to an acceptable level. You should use this template to create your strategy. 2.4 Create a risk assessment table including the identified threats and vulnerabilities, the likelihood of their occurrence, the expected impact of the threats on the company’s operations, and the risk rating. You should answer this question based on your answer to question 2.2 and based on the experience that you gained in the basic Cybersecurity unite. The risk analysis matrix should be used in this task. The following link helps you to create your risk assessment table. On Page 10 of this file, there is an example of risk assessment. Make a similar table for this question. https://itsecurity.uiowa.edu/sites/itsecurity.uiowa.edu/files/sampleriskassessmentreport.pdf