FINM7405 Financial Risk Management
Financial Risk Management
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FINM7405 Financial Risk Management
Exam information
Course code and title
FINM7405
Financial Risk Management
Semester Semester 1, 2023
Exam type Online, non-invigilated, end-of-semester examination
Exam technology File upload to Blackboard Assignment
Exam date and time
Refer to your personal exam timetable for the scheduled date and time of this exam. Your
examination will begin at the time specified in your personal examination timetable. If
commence your examination after this time, the end for your examination does not change.
For example, if your examination is schedule for 10am with an end time of 11:40am, even if
you commence at 10:30am your end time is still 11:40am.
The total time for your examination from the scheduled starting time will be:
2 hours 10 minutes including 10 minutes planning time.
A 15-minute submission period is available for submitting your examination. If your
examination is submitted after this period late penalties will be applied unless you can
demonstrate that there were problems with the system and/or process that were beyond
your control.
Exam window
You must commence your exam at the time listed in your personalised timetable.
You have from the start date/time to the end date/time listed in which you must complete
your exam.
Permitted materials This is an open book exam – all course materials are permitted.
Recommended
materials
Ensure the following materials are available during the exam:
Calculator; bilingual dictionary; phone/camera/scanner
Instructions
You will need to download the question paper included within the Blackboard Test. Once
you have completed the exam, upload the completed exam answers file to the Blackboard
assignment submission link.
You may choose to either type your response OR hand write and scan-to-pdf your response
If you believe there is missing or incorrect information impacting your ability to answer any
particular question, please state this when answering that question.
Who to contact
Given the nature of this examination, responding to student queries and/or relaying
corrections to exam content during the exam may not be feasible.
At the end of the exam there will be a free text box field. Please use this to specify any
assumptions you have made in completing the exam and which questions those
assumptions relate to. You may also include queries you may have made with respect to a
particular question, should you have been able to ‘raise your hand’ in an examination room.
If you experience any interruptions to your examination, please collect evidence of the
interruption (e.g. photographs, screenshots or emails).
If you experience any issues during the examination, contact the Library AskUs service for
advice as soon as practicable:
Chat: support.my.uq.edu.au/app/chat/chat_launch_lib
Phone: +61 7 3335 7047
Email: [email protected]
You should also ask for an email documenting the advice provided so you can provide this
to the course coordinator immediately at: [email protected]
Important exam
condition
information
You are responsible for managing your multi-factor authentication in this examination.
Please check the guidance on How do I MFA before an online exam?
Academic integrity is a core value of the UQ community and as such the highest standards
of academic integrity apply to all examinations, whether undertaken in-person or online.
This means:
• You are permitted to refer only to the allowed resources for this exam, and you
must not use any instances of work that has been submitted previously elsewhere.
Semester One Examinations, 2023
FINM7405 Financial Risk Management
• You are not permitted to consult any other person – whether directly, online, or
through any other means – about any aspect of this examination during the period
that it is available.
• If it is found that you have given or sought outside assistance with this examination,
then that will be deemed to be cheating.
If you submit your online exam after the end of your specified planning time, duration, and
15 minutes submission time, the following penalties will be applied to the total mark
available for the assessment:
• Less than 5 minutes – 5% penalty
• From 5 minutes to less than 15 minutes – 20% penalty
• More than 15 minutes – 100% penalty
These penalties will be applied to all online exams unless there is sufficient evidence of
problems with the system and/or process that were beyond your control.
Undertaking this online exam deems your commitment to UQ’s academic integrity pledge as
summarised in the following declaration:
“I certify that I have completed this examination in an honest, fair and trustworthy manner,
that my submitted answers are entirely my own work, and that I have neither given nor
received any unauthorised assistance on this examination”.
Semester One Examinations, 2023
FINM7405 Financial Risk Management
Question 1 – Options (15 Marks)
A European call option that expires in 9 month’s time has strike price of $12. The underlying
stock is currently priced at $9. The stock has a historical standard deviation of 0.4 and the
risk free rate is 10%.
A. Calculate the fair value of the option. Show all working. (3 Marks)
B. Calculate the price of the call if the historical standard deviation is 0.6. Explain the
change in the price. (2 Marks)
C. Ignore part B. Calculate the price of a put option with the same exercise price and
date as the above call. (3 Marks)
D. Draw the payoff diagram for this put option. Label the point at which the payoff profile
crosses the X-axis. (2 Marks)
E. The put is currently selling on the market for $3.00. If you think that the put is mis-
priced, devise a strategy to arbitrage the situation where you have a positive net-
payoff at time t=0 and a 0 net payoff at time t=9 months. (2.5 Marks)
F. Now imagine the put is currently selling for $2.10. If you think that the put is mis-
priced, devise a strategy to arbitrage the situation where you have 0 net-payoff at
time t=0 and a positive net payoff at time t=9 months. (2.5 Marks)
Question 2 – Currency Swaps (15 Marks)
You have recently issued a EuroYuan bond. As you are an Australian liability manager you
decide to hedge your position using a “Yuan fixed for AUD floating” currency swap. You
have the following information.
Exchange Rate: AUD 0.25 for 1 Yuan
Tenor of Swap: 1 year, semi-annual payments
Market yield on 1 year AUD bond: 7%
Market yield on 1 year Yuan bond: 8.5%
Current 6 month AUD-LIBOR: 3.5%
Current 6 month Yuan-LIBOR: 4.3%
A. How much are you lending and in what currency? (1 Mark)
B. How much are you borrowing and in what currency? (1 Mark)
C. What is the value of the currency swap to you today? (1 Mark)
D. What is the Yuan swap rate? (1 Mark)
E. How much are you expected to receive and pay 6 months from today? (2 Marks)
F. Recalculate the value of the swap if the market yield on a 1 year Yuan bond is 6.5%.
Explain why the value of the currency swap has changed. (2 Marks)
G. Recalculate the value of the swap if the current exchange rate is AUD 0.35 for 1
Yuan. Explain why the value of the currency swap has changed. (2 Marks)
H. Three months have passed. You have the following information:
Exchange Rate: AUD 0.20 for 1 Yuan
Market yield on 1 year AUD bond: 7.3%
Market yield on 1 year Yuan bond: 8.8%
Current 6 month AUD-LIBOR: 4.1%
Current 6 month Yuan-LIBOR: 4.4%
Calculate the current value of the swap to you. (5 Marks)
Semester One Examinations, 2023
FINM7405 Financial Risk Management
Question 3 – MBS (5 Marks)
Read this article and answer the following questions. You should only need a maximum of
100 words in each question but there will be no punishment for going over or under this.
A. Why is there less demand for MBS in the market at the moment? (1 Mark)
B. What result will this have on people trying to get mortgage? (1 Mark)
C. The last line of the article says “That should pressure spreads to widen as well”.
Explain what the author means by this. (1 Mark)
D. In the 3rd to last paragraph the author says:
“Issuance of MBS shot up since 2020 as central banks slashed interest rates and the
Federal Reserve bought them in bulk to bolster credit markets.”
Explain what they mean by this. (2 Marks)
Question 4 – Hedging (5 Marks)
You plan to borrow $1 million in 3 month’s time which you will do by issuing 10 90-day
BABs. You are concerned that rates could increase over this time and so decide to hedge
your position using a 90-day BAB futures contract which is currently priced at $92.25.
After three months the yield on a 90 day BAB is 12%.
A. Calculate the net interest you would pay if you do not hedge. (1 Mark)
B. Calculate the net interest you would pay if you do hedge. (2 Marks)
Now imagine that instead, the yield on a 90 day BAB is 5%.
C. Calculate the net interest you pay if you hedge as you did in part B. (2 Marks)