,RSK4804 Assignment 2 2025 WELL ANSWERED
QUESTIONS Due 30 August 2025
RSK4804 — Assignment 2 (Answer guide) — Detailed worked
answers & marking scheme
Due: 30 August 2025 — You asked for everything explained
clearly; below I give model answers, worked formulas, an
illustrative numeric example where the question asks for
computation (so you can copy/adjust with your own
numbers), and a suggested marking breakdown so you know
how to get full marks.
QUESTION 1 — Credit Default Swaps (Total: 10 marks)
(a) Why are credit default swaps (CDS) necessary? (2 marks)
Model answer (concise):
1. Risk transfer / hedging: CDS allow lenders/investors to
transfer the credit risk of a borrower (default,
restructuring) to another party — this hedges exposure
without selling the underlying loan or bond. (1 mark)
2. Price discovery & liquidity: CDS markets provide market-
implied default probabilities and increase liquidity for
credit risk, enabling better pricing of credit risk and
facilitating trading/positioning. (1 mark)
, Marking guidance (2 marks): 1 mark for hedging/risk-transfer
idea; 1 mark for market/pricing/liquidity function.
(b) Why are some investors not in favour of CDS? (2 marks)
Model answer (concise):
1. Counterparty risk & opacity: CDS expose the buyer to the
credit of the protection seller — if the seller defaults,
protection may evaporate. Markets can be opaque (OTC)
and complicated. (1 mark)
2. Moral hazard & speculative use: CDS can be used for
speculative bets (“naked” CDS) creating moral hazard and
amplifying systemic risk; they may also obscure actual
exposures. (1 mark)
Marking guidance (2 marks): 1 mark for counterparty/opacity
point; 1 mark for moral hazard/speculation/systemic risk.
(c) Case analysis: Magong Rural Investments and Moepi
Minerals Exploration (6 marks)
Context (assumed): Magong holds industry/loan exposure to
Moepi (a small mining explorer). Moepi is capital-intensive
and cyclical; there are worries about commodity prices and
exploration risk. Magong is assessing whether to use CDS or
other actions.
QUESTIONS Due 30 August 2025
RSK4804 — Assignment 2 (Answer guide) — Detailed worked
answers & marking scheme
Due: 30 August 2025 — You asked for everything explained
clearly; below I give model answers, worked formulas, an
illustrative numeric example where the question asks for
computation (so you can copy/adjust with your own
numbers), and a suggested marking breakdown so you know
how to get full marks.
QUESTION 1 — Credit Default Swaps (Total: 10 marks)
(a) Why are credit default swaps (CDS) necessary? (2 marks)
Model answer (concise):
1. Risk transfer / hedging: CDS allow lenders/investors to
transfer the credit risk of a borrower (default,
restructuring) to another party — this hedges exposure
without selling the underlying loan or bond. (1 mark)
2. Price discovery & liquidity: CDS markets provide market-
implied default probabilities and increase liquidity for
credit risk, enabling better pricing of credit risk and
facilitating trading/positioning. (1 mark)
, Marking guidance (2 marks): 1 mark for hedging/risk-transfer
idea; 1 mark for market/pricing/liquidity function.
(b) Why are some investors not in favour of CDS? (2 marks)
Model answer (concise):
1. Counterparty risk & opacity: CDS expose the buyer to the
credit of the protection seller — if the seller defaults,
protection may evaporate. Markets can be opaque (OTC)
and complicated. (1 mark)
2. Moral hazard & speculative use: CDS can be used for
speculative bets (“naked” CDS) creating moral hazard and
amplifying systemic risk; they may also obscure actual
exposures. (1 mark)
Marking guidance (2 marks): 1 mark for counterparty/opacity
point; 1 mark for moral hazard/speculation/systemic risk.
(c) Case analysis: Magong Rural Investments and Moepi
Minerals Exploration (6 marks)
Context (assumed): Magong holds industry/loan exposure to
Moepi (a small mining explorer). Moepi is capital-intensive
and cyclical; there are worries about commodity prices and
exploration risk. Magong is assessing whether to use CDS or
other actions.
