Exam (elaborations)
RSK4805 Assignment 3 2024 - DUE 15 August 2024
- Course
- RSK4805 (RSK4805)
- Institution
- University Of South Africa
RSK4805 Assignment 3 2024 - DUE 15 August 2024 QUESTIONS WITH ANSWERS
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RSK4805 Assignment3 2024 - DUE 15
August 2024
QUESTIONS WITH COMPLETE ANSWERS
[School]
[Course title]
, RSK4805 Assignment 3 2024 - DUE 15 August 2024
Question 1 (25 marks)
1.1 A bank estimates that its profit next year is normally distributed with a mean of 0.8% of
assets and a standard deviation of 2% of assets. How much equity (as a percentage of assets)
does the company need to be 99% sure that it will have positive equity at the end of the year?
(Use z-values rounded to two decimal places) (2)
1.2 Given the following information for a listed company, the expected return if invested in the
shares of this company is 7.80%. Calculate the variance and the standard deviation of this
expected return. (3) State of Economy Probability Percentage Return State 1 0.30 13% State 2
0.35 8% State 3 0.15 2% State 4 0.20 4%
1.3 Describe an exchange-traded fund (ETF) and identify an advantage of an ETF compared to a
closed-end fund (CEF). (2)
1.4 Suppose you currently hold a security valued at R750, and the prevailing risk-free rate is
5.5%. You plan to sell this security in three months. The theoretical forward contract price is
calculated at R760.12 and will be used to hedge against potential price declines. Now, if the
dealer offers a tradable price to unlock the arbitrage profit of R745 on the forward contract,
determine the arbitrage opportunity available to you, and subsequently, provide a calculation for
the potential arbitrage profit. (5)
1.5 You are a risk manager at a big corporation. How can you update the volatility estimate for
an asset when the closing price yesterday was R375, and the estimated daily volatility was 1.2%?
Today’s closing price is R371. You need to consider the following two methods for updating the
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