RSK4805
ASSIGNMENT 2 2025
UNIQUE NO. 865771
DUE DATE: 30 AUGUST 2025
,Credit Risk Management
Question 1
a. Credit default swaps (CDS) are vital financial instruments in credit risk management.
They offer a means for investors to hedge against the risk of default by a borrower. A
CDS acts like insurance: if a borrower defaults, the CDS seller compensates the buyer.
They also promote liquidity in bond markets and help with credit pricing (Hull, 2018).
b. Some investors oppose CDS due to systemic risk concerns. Speculation without
owning the underlying asset can destabilize markets. Additionally, they may introduce
moral hazard and lack transparency in over-the-counter markets (Stulz, 2010).
c. In the event Moepi Minerals defaults, Sedibelo Development Bank (the CDS seller)
pays the difference between the bond’s par and recovery value to Magong Platinum
Project. If no default occurs, Magong pays an annual premium (2.5% of R80m = R2m)
for three years (total R6m) and retains default protection.
Question 2
a. The portfolio’s expected return is calculated as follows:
E[Rp] = (0.45 × 0.12) + (0.20 × 0.08) + (0.35 × 0.13) = 11.55%
Portfolio variance:
σ² = (0.45² × 0.14²) + (0.20² × 0.13²) + (0.35² × 0.17²) + 2(0.45×0.20×0.02) +
2(0.45×0.35×0.04) + 2(0.20×0.35×0.03)
σ² ≈ 0.04296 → σ ≈ 20.72%
b. Credit portfolio beta measures how sensitive a credit portfolio is to systemic market
movements. It helps assess potential losses during downturns and guides asset
allocation strategies (Jarrow & Turnbull, 2000).
, Question 3
a. Project: Nairobi Expressway, Kenya
Location: Nairobi City
Project Sponsors: China Road and Bridge Corporation (CRBC), Kenyan Government
Project Lenders: Industrial and Commercial Bank of China
Consultants: Kenya Urban Roads Authority (KURA), Ministry of Transport
b. Risks and mitigants:
- Construction risk: mitigated by EPC contracts
- Political risk: mitigated by treaties and insurance
- Demand risk: addressed with revenue guarantees
- Environmental risk: controlled via EIA compliance
- Legal risk: managed through proper contract terms
c. Advantages:
- Reduced travel time and traffic
- Job creation
- Attraction of foreign investment
- Regional economic development
- Increased government revenue
Question 4
Average Inventory = (26+24)/2 = 25m
Average Receivables = (25+23)/2 = 24m
Average Payables = (16+18)/2 = 17m
COGS = 60% of R150m = R90m
Inventory Conversion Period = (25/90)*365 ≈ 101.39 days
Receivables Period = (24/150)*365 ≈ 58.4 days
Payables Period = (17/90)*365 ≈ 68.9 days
ASSIGNMENT 2 2025
UNIQUE NO. 865771
DUE DATE: 30 AUGUST 2025
,Credit Risk Management
Question 1
a. Credit default swaps (CDS) are vital financial instruments in credit risk management.
They offer a means for investors to hedge against the risk of default by a borrower. A
CDS acts like insurance: if a borrower defaults, the CDS seller compensates the buyer.
They also promote liquidity in bond markets and help with credit pricing (Hull, 2018).
b. Some investors oppose CDS due to systemic risk concerns. Speculation without
owning the underlying asset can destabilize markets. Additionally, they may introduce
moral hazard and lack transparency in over-the-counter markets (Stulz, 2010).
c. In the event Moepi Minerals defaults, Sedibelo Development Bank (the CDS seller)
pays the difference between the bond’s par and recovery value to Magong Platinum
Project. If no default occurs, Magong pays an annual premium (2.5% of R80m = R2m)
for three years (total R6m) and retains default protection.
Question 2
a. The portfolio’s expected return is calculated as follows:
E[Rp] = (0.45 × 0.12) + (0.20 × 0.08) + (0.35 × 0.13) = 11.55%
Portfolio variance:
σ² = (0.45² × 0.14²) + (0.20² × 0.13²) + (0.35² × 0.17²) + 2(0.45×0.20×0.02) +
2(0.45×0.35×0.04) + 2(0.20×0.35×0.03)
σ² ≈ 0.04296 → σ ≈ 20.72%
b. Credit portfolio beta measures how sensitive a credit portfolio is to systemic market
movements. It helps assess potential losses during downturns and guides asset
allocation strategies (Jarrow & Turnbull, 2000).
, Question 3
a. Project: Nairobi Expressway, Kenya
Location: Nairobi City
Project Sponsors: China Road and Bridge Corporation (CRBC), Kenyan Government
Project Lenders: Industrial and Commercial Bank of China
Consultants: Kenya Urban Roads Authority (KURA), Ministry of Transport
b. Risks and mitigants:
- Construction risk: mitigated by EPC contracts
- Political risk: mitigated by treaties and insurance
- Demand risk: addressed with revenue guarantees
- Environmental risk: controlled via EIA compliance
- Legal risk: managed through proper contract terms
c. Advantages:
- Reduced travel time and traffic
- Job creation
- Attraction of foreign investment
- Regional economic development
- Increased government revenue
Question 4
Average Inventory = (26+24)/2 = 25m
Average Receivables = (25+23)/2 = 24m
Average Payables = (16+18)/2 = 17m
COGS = 60% of R150m = R90m
Inventory Conversion Period = (25/90)*365 ≈ 101.39 days
Receivables Period = (24/150)*365 ≈ 58.4 days
Payables Period = (17/90)*365 ≈ 68.9 days
