Risk Hedging – NBC Institute

CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

Question

There are different methods of managing and controlling risks. Explain and illustrate any THREE of the following approaches to risk management:
i. Risk Diversification
ii. Risk Transfer
iii. Risk Sharing
iv. Risk Hedging (15 Marks)

Answer

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Tags: Credit risk, Risk Diversification, Risk Hedging, Risk Sharing, Risk Transfer
Level: Level 2

Topic: Risk Management and Corporate Strategy
Series: NOV 2015

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

Question

a. A friend of yours who recently lost his job came to you for advice on how to invest his life savings in a way that will minimize the risk of loss of capital.

i. Advise him on how risk of losses could be minimized using the following:
1. Risk Diversification (1 Mark)
2. Risk Transfer (1 Mark)
3. Risk Sharing (1 Mark)
4. Risk Hedging (1 Mark)
5. Risk Avoidance (1 Mark)
ii. Explain to your friend when risk diversification is the best option for him. (4 Marks)

b. What is risk appetite? Explain THREE factors that determine the risk appetite of a company. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Risk Avoidance, Risk Diversification, Risk Hedging, Risk Sharing, Risk Transfer
Level: Level 2

Topic: Risk Management and Corporate Strategy
Series: MAY 2022

AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk

Assess the advantages and disadvantages of interest rate swaps and recommend a hedging strategy. Also, explain internal factors for transfer pricing.

Question

JB Investments Holding Ltd (JB) is a multinational company that is committed to a policy of expansion into African countries. JB finances foreign projects with loans obtained in the currency in which project cash flows are received. JB financed an operation in Liberia with a syndicated loan of $20 million. Currently, the loan has three years to maturity. The loan requires semiannual interest payments at a fixed rate of 6.5% per annum, but JB prefers a floating interest rate as the pattern of cash flows from the Liberian project has changed.

The Finance Director talked to the creditors about JB’s preference for a floating interest rate. The creditors have agreed to accept a floating rate of LIBOR plus 200 basis points over the remaining three years of the loan term. However, the Finance Director feels that this rate is rather too high considering JB’s credit rating. She is therefore considering two alternatives for managing the interest rate risk exposure.

Alternative 1: Coupon swap with a bank
Engage in a coupon swap with UT Bank through which JB trades-in its fixed rate interest payments obligation for floating rate interest payments. The table below presents UT Bank’s bid and ask quotes for fixed dollar coupon rates:

Loan term to maturity	Bid	Ask	Treasury note (TN) rate
2 years	2-year TN rate + 30 basis points	2-year TN rate + 40 basis points	5.3%
3 years	3-year TN rate + 35 basis points	3-year TN rate + 50 basis points	5.9%
4 years	4-year TN rate + 40 basis points	4-year TN rate + 60 basis points	6.7%
5 years	5-year TN rate + 45 basis points	5-year TN rate + 70 basis points	7.8%

Floating rate quotation: Floating rates are pegged at 6-month dollar LIBOR plus 100 basis points.

Alternative 2: Coupon swap with another multinational company
Engage in a coupon swap with McEwen Ltd, a multinational company that has a floating rate dollar debt but prefers fixed coupon payments. The interest rate on McEwen’s dollar debt is LIBOR plus 150 basis points but it can borrow fixed rate dollars at 8%. Assume JB can borrow floating rate dollars at LIBOR plus 200 basis points.

Required:
(a)
i) Discuss TWO (2) advantages and TWO (2) disadvantages of hedging interest rate risk with an interest rate swap. (4 marks)
ii) Based on the restructuring deal with the creditors and the two interest rate swap alternatives, recommend a hedging strategy for interest payments on the $20 million debt. Support your recommendation with relevant computations. (10 marks)

(b) The Board of Directors of JB Investments Holdings Ltd is considering a transfer pricing policy for the transfer of goods and services among the company and its foreign subsidiaries.
Required:
Explain THREE (3) internal factors (motivations) for transfer pricing, which the board should consider in formulating a transfer pricing policy for the company. (6 marks)
(Total = 20 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Interest Rate Swap, Internal Factors, Motivation, Risk Hedging, Transfer Pricing
Level: Level 3

Topic: The use of financial derivatives to hedge against interest rate risk
Series: NOV 2015

CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Credit risk, Risk Diversification, Risk Hedging, Risk Sharing, Risk Transfer
Level: Level 2

Topic: Risk Management and Corporate Strategy
Series: NOV 2015

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

Question

a. A friend of yours who recently lost his job came to you for advice on how to invest his life savings in a way that will minimize the risk of loss of capital.

i. Advise him on how risk of losses could be minimized using the following:
1. Risk Diversification (1 Mark)
2. Risk Transfer (1 Mark)
3. Risk Sharing (1 Mark)
4. Risk Hedging (1 Mark)
5. Risk Avoidance (1 Mark)
ii. Explain to your friend when risk diversification is the best option for him. (4 Marks)

b. What is risk appetite? Explain THREE factors that determine the risk appetite of a company. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Risk Avoidance, Risk Diversification, Risk Hedging, Risk Sharing, Risk Transfer
Level: Level 2

Topic: Risk Management and Corporate Strategy
Series: MAY 2022

AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk

Assess the advantages and disadvantages of interest rate swaps and recommend a hedging strategy. Also, explain internal factors for transfer pricing.

Question

Loan term to maturity	Bid	Ask	Treasury note (TN) rate
2 years	2-year TN rate + 30 basis points	2-year TN rate + 40 basis points	5.3%
3 years	3-year TN rate + 35 basis points	3-year TN rate + 50 basis points	5.9%
4 years	4-year TN rate + 40 basis points	4-year TN rate + 60 basis points	6.7%
5 years	5-year TN rate + 45 basis points	5-year TN rate + 70 basis points	7.8%

Floating rate quotation: Floating rates are pegged at 6-month dollar LIBOR plus 100 basis points.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Interest Rate Swap, Internal Factors, Motivation, Risk Hedging, Transfer Pricing
Level: Level 3

Topic: The use of financial derivatives to hedge against interest rate risk
Series: NOV 2015

Question Tag: Risk Hedging

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CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk

Assess the advantages and disadvantages of interest rate swaps and recommend a hedging strategy. Also, explain internal factors for transfer pricing.

CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk

Assess the advantages and disadvantages of interest rate swaps and recommend a hedging strategy. Also, explain internal factors for transfer pricing.

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CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

You're reporting an error for "CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy"

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

You're reporting an error for "CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy"

AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk

Assess the advantages and disadvantages of interest rate swaps and recommend a hedging strategy. Also, explain internal factors for transfer pricing.

You're reporting an error for "AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk"

CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy

Discusses various methods for managing and controlling risks in an organization, illustrating different risk management techniques.

You're reporting an error for "CSME – Nov 2015 – L2 – Q1b – Risk Management and Corporate Strategy"

CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy

Advise on investment strategies to minimize risks and explain factors determining risk appetite.

You're reporting an error for "CSME – May 2022 – L2 – SC – Q5 – Risk Management and Corporate Strategy"

AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk

Assess the advantages and disadvantages of interest rate swaps and recommend a hedging strategy. Also, explain internal factors for transfer pricing.

You're reporting an error for "AFM – Nov 2015 – L3 – Q4 – The use of financial derivatives to hedge against interest rate risk"

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