Unit 5

Question 1

What are the 5 fundamental concepts of portfolio management?

Answer 1

1. risk
2. Reward
3. Diversification
4. Leverage
5. Hedging

Question 2

What are the 4 main benefits of portfolio management for a risk portfolio?

Answer 2

1. Encourages unbundling into component projects
2. Mechanism for aggregating risks across the organisation
3. Provides a Framework for concentration limits and asset allocation targets
4. influences investment, pricing and capital allocation

Question 3

What are the 4 key types of responses to risks?

Answer 3

Accept, Manage, Transfer, Avoid

Question 4

What are the 2 categories of Alternative Risk Transfer products?

Answer 4

alternative vehicle in capital market instruments

unconventional products covering conventional risks

Question 5

What are 3 advantages and disadvantages of Alternative Risk Transfer products?

Answer 5

Advantages 1. improves the organisational focus 2. provides customisation and timing 3. earnings stability Disadvantages 1. high initial costs 2. complex - time and cost to develop 3. staff need to be educated to understand and assess the seller

Question 6

what are the 3 points to market risk management?

Answer 6

Diversification

Investment strategy

Hedging

Question 7

What is involved in market risk management best practice?

Answer 7

Seek competitive advantage - pricing and better intelligence

sophisticated modelling tools

Market risk function - is a corporate control and profit centre, maximising profits within risk limits

Question 8

What are 2 advantages and 3 disadvantages of using derivatives?

Answer 8

ADVANTAGES

• cheaper and easier than underlying
• flexible - can change exposure quickly

DISADVANTAGES

• an ineffective strategy can possibly result in losses
• its a costly process
• requires management’s time
• requires experienced staff

Question 9

Define Basis Risk

Answer 9

The difference in price between the asset and the price of the future at a particular point in time

Question 10

Define the currency cashflow management techniques?

Answer 10

Netting - pay outflows with same currency as inflows (i.e. don’t exchange currencies)

Leading and Lagging - exploit exp movement in exchange rates, paying when its favourable and holding off when it is not

Question 11

What is the hedging formula for delta, gamma and vega hedging?

Answer 11

Question 12

What is spearman’s rho sample formula?

Answer 12

Question 13

What is the formula for Kendall’s tau sample?

Answer 13