RSK4804
Assignment 2 2025
(Answer Guide) -
Due 30 August 2025
QUESTIONS WITH 100%
VERIFIED AND
CERTIFIED ANSWERS.
,1|Page
RSK4804 Assignment 2 2025 (Answer Guide) - Due 30 August 2025
VERIFIED AND CERTIFIED ANSWERS. WRITTEN IN REQUIRED FORMAT AND WITHIN
GIVEN GUIDELINES. IT IS GOOD TO USE AS A GUIDE AND FOR REFERENCE, NEVER
PLAGARIZE. Thank you and success in your academics.
UNISA, 2025
Contents
Question 1: Credit Default Swaps........................................................................................................ 2
(a) Why are credit default swaps (CDS) necessary? (2 marks) ............................................... 2
(b) Why are some investors not in favour of credit default swaps? (2 marks).................... 2
(c) Case Analysis: Magong Rural Investments and Moepi Minerals Exploration (6
marks) ..................................................................................................................................................... 3
Question 2: Portfolio Risk and Credit Portfolio Beta ..................................................................... 5
(a) Determine the expected return and standard deviation of the portfolio (8 marks) ...... 5
(b) Explain the significance of a credit portfolio beta (1 mark) ............................................... 7
Question 3: Infrastructure Development and Project Finance .................................................... 8
(a) Identification of a Major Infrastructure Project (5 marks) ................................................... 8
(b) Project-Specific Risks and Related Mitigants (10 marks) ................................................... 8
(c) Socioeconomic Advantages of the Project (5 marks) ........................................................ 10
Question 4: Working Capital Management – Cash Conversion Cycle ..................................... 11
1. Debtors Collection Period (DCP) ............................................................................................... 12
2. Inventory Conversion Period (ICP) ........................................................................................... 12
3. Operating Cycle (OC) .................................................................................................................... 13
4. Cash Conversion Cycle (CCC) ................................................................................................... 13
5. Interpretation: Given Cash Conversion Cycle vs Industry ................................................. 13
References ............................................................................................................................................... 14
, 2|Page
Question 1: Credit Default Swaps
(a) Why are credit default swaps (CDS) necessary? (2 marks)
Credit default swaps (CDS) are essential financial instruments used primarily for credit
risk management. They allow investors or lenders to transfer the credit risk of a
borrower or debt instrument to another party in exchange for a premium. In simple
terms, a CDS works like insurance against a borrower defaulting on a loan or bond. For
instance, if a company or government entity defaults on its obligations, the seller of the
CDS compensates the buyer for the loss (Hull, 2018).
CDS instruments provide credit protection, allowing investors to manage their
exposure to potential defaults without having to sell the underlying asset. This flexibility
is especially important in volatile markets, where selling assets might not be feasible or
desirable.
(b) Why are some investors not in favour of credit default swaps? (2 marks)
Despite their usefulness, some investors are critical of CDS due to the systemic risks
and speculative behaviour they may encourage. One major concern is that CDS can
be used for speculation rather than genuine risk protection. Investors who do not
own the underlying debt can still buy CDS contracts, effectively betting that a company
will default a practice known as a "naked CDS". This can amplify market stress and
lead to artificial downward pressure on the value of debt instruments (Mishkin &
Eakins, 2019).
Furthermore, during the 2008 Global Financial Crisis, the interconnectedness of CDS
contracts contributed to the collapse of major institutions, as many firms were
exposed to unmanageable risks they had underwritten through CDS, with insufficient
reserves to pay out in the event of widespread defaults.
Assignment 2 2025
(Answer Guide) -
Due 30 August 2025
QUESTIONS WITH 100%
VERIFIED AND
CERTIFIED ANSWERS.
,1|Page
RSK4804 Assignment 2 2025 (Answer Guide) - Due 30 August 2025
VERIFIED AND CERTIFIED ANSWERS. WRITTEN IN REQUIRED FORMAT AND WITHIN
GIVEN GUIDELINES. IT IS GOOD TO USE AS A GUIDE AND FOR REFERENCE, NEVER
PLAGARIZE. Thank you and success in your academics.
UNISA, 2025
Contents
Question 1: Credit Default Swaps........................................................................................................ 2
(a) Why are credit default swaps (CDS) necessary? (2 marks) ............................................... 2
(b) Why are some investors not in favour of credit default swaps? (2 marks).................... 2
(c) Case Analysis: Magong Rural Investments and Moepi Minerals Exploration (6
marks) ..................................................................................................................................................... 3
Question 2: Portfolio Risk and Credit Portfolio Beta ..................................................................... 5
(a) Determine the expected return and standard deviation of the portfolio (8 marks) ...... 5
(b) Explain the significance of a credit portfolio beta (1 mark) ............................................... 7
Question 3: Infrastructure Development and Project Finance .................................................... 8
(a) Identification of a Major Infrastructure Project (5 marks) ................................................... 8
(b) Project-Specific Risks and Related Mitigants (10 marks) ................................................... 8
(c) Socioeconomic Advantages of the Project (5 marks) ........................................................ 10
Question 4: Working Capital Management – Cash Conversion Cycle ..................................... 11
1. Debtors Collection Period (DCP) ............................................................................................... 12
2. Inventory Conversion Period (ICP) ........................................................................................... 12
3. Operating Cycle (OC) .................................................................................................................... 13
4. Cash Conversion Cycle (CCC) ................................................................................................... 13
5. Interpretation: Given Cash Conversion Cycle vs Industry ................................................. 13
References ............................................................................................................................................... 14
, 2|Page
Question 1: Credit Default Swaps
(a) Why are credit default swaps (CDS) necessary? (2 marks)
Credit default swaps (CDS) are essential financial instruments used primarily for credit
risk management. They allow investors or lenders to transfer the credit risk of a
borrower or debt instrument to another party in exchange for a premium. In simple
terms, a CDS works like insurance against a borrower defaulting on a loan or bond. For
instance, if a company or government entity defaults on its obligations, the seller of the
CDS compensates the buyer for the loss (Hull, 2018).
CDS instruments provide credit protection, allowing investors to manage their
exposure to potential defaults without having to sell the underlying asset. This flexibility
is especially important in volatile markets, where selling assets might not be feasible or
desirable.
(b) Why are some investors not in favour of credit default swaps? (2 marks)
Despite their usefulness, some investors are critical of CDS due to the systemic risks
and speculative behaviour they may encourage. One major concern is that CDS can
be used for speculation rather than genuine risk protection. Investors who do not
own the underlying debt can still buy CDS contracts, effectively betting that a company
will default a practice known as a "naked CDS". This can amplify market stress and
lead to artificial downward pressure on the value of debt instruments (Mishkin &
Eakins, 2019).
Furthermore, during the 2008 Global Financial Crisis, the interconnectedness of CDS
contracts contributed to the collapse of major institutions, as many firms were
exposed to unmanageable risks they had underwritten through CDS, with insufficient
reserves to pay out in the event of widespread defaults.
