Reference no: EM132362153

Risk management case

The Purpose

This assignment is designed to enhance students’ knowledge in the following: an understanding of and ability to identify the financial risks faced by individuals and corporations; an ability to undertake statistical analysis, including calculation of individual and portfolio statistics in Excel; familiarity with the construction of tables and graphics and their integration into written reports; and highlevel written communication skills.

Information:

Your team has been asked to provide analysis for and advice to an Australian-based, high net worth (HNW) client, who is considering the purchase of a structured financial product (SFP) issued by a UK-based investment bank. Your client wishes to be advised on the financial risks to which they would be exposed in association with investment in this SFP.

You have the following information on this SFP, as well as information on key financial variables (as of the end of June 2019, the date you will assume for undertaking your calculations):

• Face value of GBP 50,000, with term to maturity of three years, priced in GBP at a discount to face value

• Discount rate (DISC) (% p.a.) = 3-yr spot + 3-yr spread – 120 bp

• 3-yr spot is the 3-year spot rate on UK Government liabilities, 3-yr spread is the difference between the yield on 3-year UK Treasury Gilts and UK BBB-rated corporate bonds

• The 3-yr spread at the end of June 2019 was 1.1 per cent, while the historical default rate on BBB-rated corporate bonds is 0.9 per cent

• Payoff at maturity is max{GBP50,000, [FTSET/FTSE0 x GBP50,000]}

• FTSET represents the value of the FTSE All Shares Index (GBP basis) at maturity of the investment product and FTSE0 the value of the FTSE All Shares Index (GBP basis) at inception of the investment in the structured product (i.e., the end of June 2019)

• The Australian dollar-UK Pound exchange rate (AUD/GBP, the price of 1 GBP in AUD) at the end of June 2019 was 1.8078.

• You have been provided with monthly time series data, covering the period from the end of June 2004 to the end of June 2019, on the spot rates on UK Government liabilities (% p.a.) for 1, 2, and 3 years, the AUD/ GBP exchange rate, and the value of the FTSE All Shares Index (GBP basis) (see the spreadsheet BANK 3003 Risk Management Assessment Data.xlsx).

The Task

Prepare a brief (of no more than 3 pages) report in which your team:

(a) Identifies the financial risks to which your HNW client would have exposure if invested in this SFP. (Note: you should tabulate the different financial risks to which an investor would be exposed if they bought the SFP and the sources of each financial risk.)

(b) Quantitatively analyse the risk factors for which you have data. (Hint: provide individual quantitative analysis of each risk factor, but also provide information on relationships between key risk factors.)

(c) Given your analysis of the data available to you, which financial risks do you think are likely to be of most concern to the client? Provide a brief justification/support for your answer

Attachment:- Risk Management Data.rar