APPROVED

EXAMINATION PAPER: ACADEMIC SESSION 2011/2012

Campus

Greenwich Maritime

School

Business

Department

Accounting & Finance

Course Code

FINA1084

Course Title

Financial Markets & Risk

Level

Duration

THREE HOURS

Date

August 2012

Course co-ordinator: Norman Williams

INSTRUCTIONS TO CANDIDATES
Answer THREE questions in total. Answer ONE question from Section A and TWO
from Section B.
All questions carry equal marks.
This is a CLOSED book examination. Non-programmable calculators are permitted.

August 2012
Course Title Financial Markets & Risk
Course Code FINA1084

Page 1 of 4

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Section A Answer ONE question from this section
Question One
Explain and comment on FIVE of the following:
(i)

The characteristics which allow a distinction to be drawn between different

financial assets;

(ii)

The features that distinguishes banks from other types of financial

institutions;

(iii)

The front-office, middle-office and back-office functions of an investment

bank;

(iv)

The significance of the distinction between asset-only and asset-liability

management approaches to investment management;

(v)

The features which distinguish hedge funds from traditional long-only

investment institutions;

(vi)

The reasons why investors may choose to invest in mutual funds;

(vii)

Who loses if a bank fails?

(Each part: 20% of total mark)

Question Two
(i)

The RUI corporations dividend per share is expected to grow indefinitely by

8% by year. If this years year-end dividend is 10 and the required rate of
return is 12%, what is the current stock price according to the Gordon Growth
Model? If this years year-end earnings per share are 15, what is the implied
value of the return on equity for future investment opportunities?
(40% of total mark)

(ii)

Explain a market order, a limit order and a stop order. Give one specific
example of each order and critically discuss the potential benefits and
problems of these orders.
(60% of total mark)

Question Three
Explain carefully the five key theoretical relationships among the spot exchange rates,
forward exchange rates, inflation rates, and interest rates that result from international
arbitrage activities. Use numerical examples in your answer.
(Each part: 20% of total mark)
August 2012
Course Title Financial Markets & Risk
Course Code FINA1084

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Section B Answer TWO questions from this section
Question Four
(i)

List three borrower-specific factors and two market-specific factors that enter
into the credit decision. What is the impact of each type of factor on the risk
premium?
(30% of total mark)

(ii)

Explain how a linear discriminant analysis model works. Identify and discuss
the criticisms which have been made regarding the use of this type of model to
make credit risk evaluations.
(30% of total mark)

(iii)

Explain Credit Default Swaps (CDSs) using a specific example. Discuss the
attractions of the CDS market?
(40% of total mark)

Question Five
Assume you are a portfolio manager who has recently set up an international portfolio
including equities, bonds and short term money market investments. You are
concerned about downside risk and so have recently purchased some put options to
cover the equity market exposure. In addition, your equity investments include a
number of emerging markets which you consider offer growth potential. However, it
is difficult to obtain up-to-date prices because of illiquidity issues. You have been
asked to report monthly Value at Risk figures so that investors will have an idea of the
risk that they are running. You are considering which technique to use - parametric
model, historic simulation or Monte Carlo simulation.
(i)

Define each of the techniques - parametric model, historic simulation or

Monte Carlo simulation.
(40% of total mark)

(ii)

Explain the technique which you would use in the above situation and why
you prefer that technique.
(60% of total mark)

Question Six
(i)

Define risk capital and regulatory capital. Why is capital adequacy important
to banks?
(50% of total mark)

(ii)

Critically discuss how a bank should manage its capital adequacy?

(50% of total mark)

August 2012
Course Title Financial Markets & Risk
Course Code FINA1084

Page 3 of 4

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Question Seven
(i)

Why is liquidity risk a source of concern for banking supervisors?

(40% of total mark)

(ii)

Explain and critically evaluate the policies a bank should operate to manage
liquidity risk?
(60% of total mark)

August 2012
Course Title Financial Markets & Risk
Course Code FINA1084

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