Buss 324: Risk Management Question Paper
Buss 324: Risk Management
Course:Business Administration
Institution: Kenya Methodist University question papers
Exam Year:2011
SCHOOL : SCHOOL OF BUSINESS AND ECONOMICS
DEPARTMENT : BUSINESS ADMINISTRATION
TIME : 2 HOURS
INSTRUCTIONS Answer Question ONE and any Other TWO Questions
Question 1
Kenya airways imports 1000 barrels of oil monthly. Due to the fluctuating international market oil prices, the company enters into an option with shell company ltd for a bulk 4 month supply of oil at an exercise price of sh 50 per barrel. The company has to pay 5% premium as insurance per barrel. The oil price at option maturity were sh 52 per barrel.
Required:
a) i) Demonstrate how options would be used to hedge against commodity price fluctuations. (5marks)
ii) Differentiate between an option and a forward contract. (5marks)
b) In organizational context, briefly discuss fire methods of handling risk. (10marks)
c) Insurance is very important as a financial plan in individual`s life. Explain FIVE insurance policies individuals may purchase for their own financial plan benefits. (10marks)
Question 2
a) Mr Kamau is the portfolio manager in old mutual fund Company. He has a debt fund that invested sh 200 million in long-term debentures. He wants to convert the holding into floating rate portfolio. A swap dealer offers 9% fixed at the Nairobi in the borrowing rate. Suppose NIBOR floating rate is either 8.50% , or 9.00%, or 9.50%.
i) What will Mr. Kamau do. (2marks)
ii) Show the net cash flow under the three NIBOR floating ratios. (8marks)
b) Write relevant examples, explain the types of risks business enterprises face. (10marks)
Question 3
a) Commercial banks are faced with high loan defaults. As the new credit manager of Equity bank, explain 5 credit risk management policies that the institution can adopt to reduce losses from loans to customers. (10marks)
b) Write short notes on the following.
i) Term assurance (2marks)
ii) Endowment policy (2marks)
iii) Whole life insurance (2marks)
iv) Underwriting (2marks)
v) Insurable risk (2marks)
Question 4
a) Kirikwa company took a 6 months loan with Finance Trust Bank of 10,000,000 loan with an interest of 8%. The loan being due on 31st March 2011. On 1st January 2011 the finance manager noted the up rise in interest rates. The futures are currently at Ksh 91 representing a yield of 9% given that the standard contract size is 1 million and the company sells the currency 3 months contract to hedge against interest on the 3 month loan required at 31st March. On 31st March 2011, the interest rate was 11% and the futures had fallen to shs 88.5. Demonstrate how the futures could be used to hedge against interest rate risk. (10marks)
b) Explain with examples how the insurance mechanism works. (10marks)
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