,RSK4804 Assignment 2 2025 WELL ANSWERED
QUESTIONS Due 30 August 2025
Question 1 — Credit Default Swaps (CDS) (Total 10 marks)
(a) Why are credit default swaps necessary? (2 marks)
Model answer (concise):
1. CDS enable transfer of credit risk from lenders/investors
(protection buyers) to protection sellers without selling
the underlying bond/loan — this allows lenders to hedge
default risk while keeping the asset on their books.
2. CDS improve market efficiency and price discovery for
credit risk: CDS spreads provide a market-implied
measure of default risk for a reference entity, helping
investors and regulators monitor credit conditions.
Marking pointers: 1 mark for “transfer/hedge credit risk” idea,
1 mark for “price discovery / market functioning / synthetic
exposure”.
(b) Why are some investors not in favour of credit default
swaps? (2 marks)
Model answer (concise):
1. Speculation and moral hazard: CDS allow parties to take
positions on an entity’s default without owning the
, underlying debt; this can incentivize actions that increase
default risk or amplify negative sentiment.
2. Counterparty and systemic risk / opacity: Before central
clearing became common, CDS exposed buyers to seller
default risk; also complexity and poor transparency can
magnify systemic contagion.
Marking pointers: 1 mark for each well-explained reason
(speculation/moral hazard; counterparty/systemic/opacity).
(c) Case analysis: Magong Rural Investments and Moepi
Minerals Exploration (6 marks)
You didn’t give case facts — below is an examiner-ready
structure and a worked example showing how to analyse such
a case.
How to structure the answer (high-scoring):
1. Brief facts summary (1 mark): restate the central fact
pattern (e.g., Magong holds X of Moepi bonds or has
exposure from a loan; Moepi is exploration miner with
commodity price & political risk).
2. Identify credit exposures & drivers of default risk (1
mark): e.g., commodity price sensitivity,
operational/permit risk, small asset base, high leverage,
correlated local economic risks.
QUESTIONS Due 30 August 2025
Question 1 — Credit Default Swaps (CDS) (Total 10 marks)
(a) Why are credit default swaps necessary? (2 marks)
Model answer (concise):
1. CDS enable transfer of credit risk from lenders/investors
(protection buyers) to protection sellers without selling
the underlying bond/loan — this allows lenders to hedge
default risk while keeping the asset on their books.
2. CDS improve market efficiency and price discovery for
credit risk: CDS spreads provide a market-implied
measure of default risk for a reference entity, helping
investors and regulators monitor credit conditions.
Marking pointers: 1 mark for “transfer/hedge credit risk” idea,
1 mark for “price discovery / market functioning / synthetic
exposure”.
(b) Why are some investors not in favour of credit default
swaps? (2 marks)
Model answer (concise):
1. Speculation and moral hazard: CDS allow parties to take
positions on an entity’s default without owning the
, underlying debt; this can incentivize actions that increase
default risk or amplify negative sentiment.
2. Counterparty and systemic risk / opacity: Before central
clearing became common, CDS exposed buyers to seller
default risk; also complexity and poor transparency can
magnify systemic contagion.
Marking pointers: 1 mark for each well-explained reason
(speculation/moral hazard; counterparty/systemic/opacity).
(c) Case analysis: Magong Rural Investments and Moepi
Minerals Exploration (6 marks)
You didn’t give case facts — below is an examiner-ready
structure and a worked example showing how to analyse such
a case.
How to structure the answer (high-scoring):
1. Brief facts summary (1 mark): restate the central fact
pattern (e.g., Magong holds X of Moepi bonds or has
exposure from a loan; Moepi is exploration miner with
commodity price & political risk).
2. Identify credit exposures & drivers of default risk (1
mark): e.g., commodity price sensitivity,
operational/permit risk, small asset base, high leverage,
correlated local economic risks.
