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RSK4805
EXAM PACK
DISTINCTION QUALITY
UNISA EXAM
,UNISA EXAMINATIONS
UNIVERSITY EXAMINATIONS
January/February 2025
RSK4805
Market Risk Management
Total: 100 marks
Duration: 3,5 hours
EXAMINERS:
First: Dr E van der Westhuizen
Second: Dr JS de Beer
External: Dr AE van der Westhuizen
This examination paper consists of 11 pages.
INSTRUCTIONS
(i) This examination will be proctored by means of The Invigilator app. The use of the app is
compulsory. Failure to use the proctoring tool is a violation of university policies. Access The
Invigilator app now and log in.
(ii) This is an open-book examination, and you can use any calculator during the examination
session.
(iii) You may only use the prescribed book and learning units for the examination. The use of
artificial intelligence (AI) software and other online sources during the online examination is
strictly prohibited.
(iv) Answer all the questions in this paper. You only need to supply your answers to the questions;
you don’t have to rewrite the questions.
(v) Pay special attention to the structuring and numbering of your answers.
(vi) Number the questions the same as they are numbered in the examination paper.
(vii) Perform each calculation as accurately as possible and round the final answer to four
decimal places only (in the case of a percentage), unless otherwise specified in the
question.
(viii) Make sure that you number the pages of your document and that all the pages are scanned
before you upload the file. A good way to number the pages of your document is: 1 of 15, 2 of
15 and so on.
(ix) Name your file as follows: your student number_RSK4805_Exam. Make sure that you select
the correct file for uploading.
(x) Your name and student number and the module code must be clearly stated on the first page
of your document.
(xi) Make sure that the scans are readable, the right side up and not excessively large.
(xii) Make sure you stop writing after 3,5 hours and start your upload. You will only have 30
minutes to upload your answer file to the myExams platform.
(xiii) You need to adhere to the universities’ policies on plagiarism, academic integrity and copyright
infringement.
, Page 3 of 11 RSK4805
Jan/Feb2025
Question 1 [20 marks]
Question 1.1 (10 marks)
1.1.1 The return from the market last year was 10% per annum and the risk-free rate was 6% per
annum. A hedge fund manager with a beta of 1.1 has an alpha of 5%. Given the performance
of the market last year, what annual return did the hedge fund manager earn? (2)
1.1.2 The following information relates to a share in Lowveld Bank:
State of the economy Probability Annual Return
Expansion 0.45 16%
Sustained growth 0.25 10%
Recession 0.30 3%
a) Using the information provided, calculate the expected return, variance and standard
deviation of the share in Lowveld Bank. (5)
b) The expected return on the market portfolio is 9% per annum. Indicate whether Lowveld
Bank’s share has more, less or equal systematic risk and provide a reason for your answer.
(3)
Question 1.2 (10 marks)
1.2.1 An investment bank has been asked to underwrite an issue of 10 million shares by a
company. It is trying to decide between a firm commitment, where it buys the shares for $25
per share, and a best efforts arrangement, where it charges a fee of 30 cents for each share
sold. As part of the procedure to assess the risk, it considers two scenarios: firstly, where the
price that it can obtain per share is $30 and, secondly, where it can only receive a price of
$23 per share. Explain the difference between the two alternative arrangements. Show all
calculations. (5)
1.2.2 What is the function of a market maker in securities trading? Your answer should include the
function, together with the profits and risks involved. (3)
1.2.3 Explain the two net asset values (NAVs) of a close-ended mutual fund. (2)
, Page 4 of 11 RSK4805
Jan/Feb2025
Question 2 [35 marks]
Question 2.1 (8 marks)
2.1.1 You enter into a futures contract to sell white maize for R1 845 per tonne. The contract is for
the delivery of 1 000 tonnes. The initial margin is R200 000 and the maintenance margin is
R60 000. You receive a margin call of R140 000. What change in the futures price led to this
margin call? (Show all relevant calculations.) (3)
2.1.2 You enter into a short futures contract to sell 120 000 Swiss francs for US dollars at an
exchange rate of 1.13 US dollars per Swiss franc. Will you make a profit or a loss at the end
of the contract if the exchange rate goes up to 1.15? (Show all calculations.) (3)
2.1.3 Explain the difference between an American option and a European option. (2)
Question 2.2 (9 marks)
2.2.1 Suppose that the price of an asset at the close of trading yesterday was $350 and its volatility
was estimated as 1.4% per day. The price at the close of trading today is $347. The
proportional change in the price of the asset is -0.00857. What is the new volatility estimate
when using a GARCH(1,1) model with ω = 0.000003, α = 0.05 and β = 0.95? (4)
2.2.2 Suppose the parameters in a GARCH(1,1) model are α = 0.03, β = 0.93 and ω = 0.000005.
The current daily volatility is estimated to be 1.3%.
(a) What is the long-run average volatility? (3)
(b) Estimate the daily volatility in 20 days. (2)
Question 2.3 (9 marks)
2.3.1 Suppose that the current daily volatilities of asset A and asset B are 1.65% and 2.32%,
respectively. The prices of the assets at the close of trading yesterday were $35 and $52,
and the estimate of the coefficient of correlation between the returns on the two assets made
at that time was 0.26. The parameter λ used in the exponentially weighted moving average
(EWMA) model is 0.95.
(a) Calculate the current estimate of the covariance between the assets. (2)
RSK4805
EXAM PACK
DISTINCTION QUALITY
UNISA EXAM
,UNISA EXAMINATIONS
UNIVERSITY EXAMINATIONS
January/February 2025
RSK4805
Market Risk Management
Total: 100 marks
Duration: 3,5 hours
EXAMINERS:
First: Dr E van der Westhuizen
Second: Dr JS de Beer
External: Dr AE van der Westhuizen
This examination paper consists of 11 pages.
INSTRUCTIONS
(i) This examination will be proctored by means of The Invigilator app. The use of the app is
compulsory. Failure to use the proctoring tool is a violation of university policies. Access The
Invigilator app now and log in.
(ii) This is an open-book examination, and you can use any calculator during the examination
session.
(iii) You may only use the prescribed book and learning units for the examination. The use of
artificial intelligence (AI) software and other online sources during the online examination is
strictly prohibited.
(iv) Answer all the questions in this paper. You only need to supply your answers to the questions;
you don’t have to rewrite the questions.
(v) Pay special attention to the structuring and numbering of your answers.
(vi) Number the questions the same as they are numbered in the examination paper.
(vii) Perform each calculation as accurately as possible and round the final answer to four
decimal places only (in the case of a percentage), unless otherwise specified in the
question.
(viii) Make sure that you number the pages of your document and that all the pages are scanned
before you upload the file. A good way to number the pages of your document is: 1 of 15, 2 of
15 and so on.
(ix) Name your file as follows: your student number_RSK4805_Exam. Make sure that you select
the correct file for uploading.
(x) Your name and student number and the module code must be clearly stated on the first page
of your document.
(xi) Make sure that the scans are readable, the right side up and not excessively large.
(xii) Make sure you stop writing after 3,5 hours and start your upload. You will only have 30
minutes to upload your answer file to the myExams platform.
(xiii) You need to adhere to the universities’ policies on plagiarism, academic integrity and copyright
infringement.
, Page 3 of 11 RSK4805
Jan/Feb2025
Question 1 [20 marks]
Question 1.1 (10 marks)
1.1.1 The return from the market last year was 10% per annum and the risk-free rate was 6% per
annum. A hedge fund manager with a beta of 1.1 has an alpha of 5%. Given the performance
of the market last year, what annual return did the hedge fund manager earn? (2)
1.1.2 The following information relates to a share in Lowveld Bank:
State of the economy Probability Annual Return
Expansion 0.45 16%
Sustained growth 0.25 10%
Recession 0.30 3%
a) Using the information provided, calculate the expected return, variance and standard
deviation of the share in Lowveld Bank. (5)
b) The expected return on the market portfolio is 9% per annum. Indicate whether Lowveld
Bank’s share has more, less or equal systematic risk and provide a reason for your answer.
(3)
Question 1.2 (10 marks)
1.2.1 An investment bank has been asked to underwrite an issue of 10 million shares by a
company. It is trying to decide between a firm commitment, where it buys the shares for $25
per share, and a best efforts arrangement, where it charges a fee of 30 cents for each share
sold. As part of the procedure to assess the risk, it considers two scenarios: firstly, where the
price that it can obtain per share is $30 and, secondly, where it can only receive a price of
$23 per share. Explain the difference between the two alternative arrangements. Show all
calculations. (5)
1.2.2 What is the function of a market maker in securities trading? Your answer should include the
function, together with the profits and risks involved. (3)
1.2.3 Explain the two net asset values (NAVs) of a close-ended mutual fund. (2)
, Page 4 of 11 RSK4805
Jan/Feb2025
Question 2 [35 marks]
Question 2.1 (8 marks)
2.1.1 You enter into a futures contract to sell white maize for R1 845 per tonne. The contract is for
the delivery of 1 000 tonnes. The initial margin is R200 000 and the maintenance margin is
R60 000. You receive a margin call of R140 000. What change in the futures price led to this
margin call? (Show all relevant calculations.) (3)
2.1.2 You enter into a short futures contract to sell 120 000 Swiss francs for US dollars at an
exchange rate of 1.13 US dollars per Swiss franc. Will you make a profit or a loss at the end
of the contract if the exchange rate goes up to 1.15? (Show all calculations.) (3)
2.1.3 Explain the difference between an American option and a European option. (2)
Question 2.2 (9 marks)
2.2.1 Suppose that the price of an asset at the close of trading yesterday was $350 and its volatility
was estimated as 1.4% per day. The price at the close of trading today is $347. The
proportional change in the price of the asset is -0.00857. What is the new volatility estimate
when using a GARCH(1,1) model with ω = 0.000003, α = 0.05 and β = 0.95? (4)
2.2.2 Suppose the parameters in a GARCH(1,1) model are α = 0.03, β = 0.93 and ω = 0.000005.
The current daily volatility is estimated to be 1.3%.
(a) What is the long-run average volatility? (3)
(b) Estimate the daily volatility in 20 days. (2)
Question 2.3 (9 marks)
2.3.1 Suppose that the current daily volatilities of asset A and asset B are 1.65% and 2.32%,
respectively. The prices of the assets at the close of trading yesterday were $35 and $52,
and the estimate of the coefficient of correlation between the returns on the two assets made
at that time was 0.26. The parameter λ used in the exponentially weighted moving average
(EWMA) model is 0.95.
(a) Calculate the current estimate of the covariance between the assets. (2)
