RSK4804 Assignment 2 (DETAILED ANSWERS) 2025 - DISTINCTION GUARANTEED

RSK4804 Assignment 2 (DETAILED ANSWERS) 2025 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ,... Question 1 Question 3 [10] As a credit analyst for a provincial development finance institute, Mmusi Trailer Manufacturing Inc. approaches your institution for a bridging finance. The following financial information is provided: o current assets of R13 million o current liabilities of R7 million o net sales of R32 million o quick ratio of 1.00 o debtors collection period of 30 days Calculate the level of inventory and receivables. Question 4 [20] With infrastructure development currently being used as a means to encourage economic activity, new projects are emerging in areas such as energy, water, transport and telecommunications. You are required to do the following: 4.1 Identify a major project in your area or country, and find out who the project sponsors, project lenders and consultants are. Write this information down in answer to this question. (5) 4.2 Discuss the various project risks and related mitigants. (10) 4.3 Discuss the socio-economic advantages of the project. (5)[10] In recent years, there has been quite a buzz about credit default swaps. The turn of events following the 2008 Global Financial Crisis became a test of the systems that settle credit default swaps. a. Why are credit default swaps (CDS) necessary? (2) b. Why are some investors not in favour of credit default swaps? (2) c. Magong Rural Investments has invested R80m in bonds issued by Moepi Minerals Exploration. Magong Rural Investments has noted that Moepi Minerals Exploration may be experiencing financial difficulties. Therefore, Magong Platinum Project buys R80 m worth of CDS protection on Moepi Minerals Exploration debt, for three years, from the Sedibelo Development Bank, at a premium of 250 bps (2.5%) per annum. Explain the scenarios of default and no default. (6) Question 2 Commercial Bank of Zamunda has a credit portfolio of R8.5 bn, with an average portfolio PD of 1.5%. The net income or margin is 2.6%. If the portfolio collapses, about 40% of recovery can happen. Therefore, the maximum loss would be R5.1 bn (60% x 8.5 bn). Hence, the outcome shows a gain of roughly R221 m versus a loss of R5.1 bn. Commercial Bank of Zamunda maintains a 10% capital adequacy ratio and the portfolio exposure (RWA) is R8.5 bn. Based on the Kelly Criterion, how much capital buffer should Commercial Bank Zamunda maintain?[9] Emfulweni Commercial Bank has a portfolio of debt of three loans totalling R20 million. The following information regarding the loans in the portfolio is provided: Loans Weight Expected return Standard deviation A 45 12% 14% B 20 8% 13% C 35 13% 17% Downloaded by Vusi Xhumalo () lOMoARcPSD| 2025 RSK4804 Assignment 2 It is determined that the covariance between loans A and B is 2%, while the covariance between loans A and C is 4%, and the covariance between loans B and C is 3%. a. Determine the expected return and standard deviation of the portfolio. (8) b. Explain the significance of a credit portfolio beta (1) Question 3 [20] With infrastructure development currently being used to encourage a country’s economic activity, new infrastructure projects are emerging in areas such as energy, water, transport, and telecommunications. You are required to do the following: a. Identify a major project in your area or country and identify the project sponsors, project lenders, and consultants. Write this information down as an answer to this question. (5) b. Discuss the various project-specific risks and related mitigants. (10) c. Discuss the socioeconomic advantages of your identified project. (5) Conditions: (a) Physical visit to the project site is a must – originality is required. You need to include project name and the location (city, village, etc.) (b) Any “cut and paste” from resources or information directly from websites will not attract marks. Question 4 (11) Commercial Bank of Zamunda has a credit portfolio of R8.5 bn, with an average portfolio PD of 1.5%. The net income or margin is 2.6%. If the portfolio collapses, about 40% of recovery can happen. Therefore, the maximum loss would be R5.1 bn (60% x 8.5 bn). Hence, the outcome shows a gain of roughly R221 m versus a loss of R5.1 bn. Commercial Bank of Zamunda maintains a 10% capital adequacy ratio and the portfolio exposure (RWA) is R8.5 bn. Based on the Kelly Criterion, how much capital buffer should Commercial Bank Zamunda maintain? You are a Corporate Banker for Geelhout Fabriek, a key client in your bank’s credit portfolio, which is a manufacturer of premium, handcrafted wood furniture. The Head of Credit of your bank would like to know how efficiently the company’s working capital is managed. She is particularly interested in the time it takes Geelhout Fabriek to collect cash from debtors, the total operating cycle, and the working capital (cash) cycle. She is also keen to see how Geelhout Fabriek’s cash cycle compares with the industry average of 90 days. The following information is given: - Downloaded by Vusi Xhumalo () lOMoARcPSD| 2025 RSK4804 Assignment 2 Account Opening balance Closing balance a) Inventory 26m 24m b) Accounts receivable 25m 23m c) Accounts payable 16m 18m Net sales during the year were R150m, while the cost of goods sold amounted to 60% of the sales. Interpret the cash conversion cycle if the industry average is 70 days. REGENERATE DIFFERENT EXAM QUESTION BASED ON THE BELOW Question 1 [10] a. Do you agree that credit be granted against security, with the knowledge that the same security might be relied upon later to recover debt? Elaborate (2) b. If you were a lender, which form of security would you prefer? Please explain. (4) c. Bank of Napoli has a RAROC hurdle rate of 15% on all lending deals. The amount lent to Donna Bella Boutique is R25m. The risk weight is 100% with capital adequacy of 10%. Accordingly, the capital required for the R25m loan is 2m; hence the target RAROC (as per Bank of Napoli’s credit policy) would be R0.70m (R2m x 35%). However, due to policy issues encountered in real life, the net margin earned on the loan is R0.38m. Donna Bella Boutique is willing to offer deposits as security up to 10% of the facility amount and this can be deployed at 2.5% net margin by Bank of Napoli. Please explore whether this will result in meeting the RAROC hurdle. The balance sheet of Prosper Manufacturing is as follows: - Liabilities Assets Share Capital 25 000 Fixed Assets 30 000 Retained Earnings 12 000 Investments 8 000 Long-term Loan 17000 Stock 16 000 Trade Creditors 22 000 Trade Debtors 20 000 Overdraft 0 Other debtors 5 000 Accruals and others 9 000 Cash 6 000 Total 85 000 Total 85 000 1. Discuss the working capital requirements (9) 2. What is your view on the liquidity of Prosper Manufacturing? (7) 3. What would be WC situation if Prosper Manufacturing doubles sales without change in the current terms of trade? Question 3 [10] As a credit analyst for a provincial development finance institute, Mmusi Trailer Manufacturing Inc. approaches your institution for a bridging finance. The following financial information is provided: o current assets of R13 million o current liabilities of R7 million o net sales of R32 million o quick ratio of 1.00 o debtors collection period of 30 days Calculate the level of inventory and receivables. Question 4 [20] With infrastructure development currently being used as a means to encourage economic activity, new projects are emerging in areas such as energy, water, transport and telecommunications. You are required to do the following: 4.1 Identify a major project in your area or country, and find out who the project sponsors, project lenders and consultants are. Write this information down in answer to this question. (5) 4.2 Discuss the various project risks and related mitigants. (10) 4.3 Discuss the socio-economic advantages of the project. (5) With infrastructure development currently being used to encourage a country’s economic activity, new infrastructure projects are emerging in areas such as energy, water, transport, and telecommunications. You are required to do the following: a. Identify a major project in your area or country and identify the project sponsors, project lenders, and consultants. Write this information down as an answer to this question. (5) b. Discuss the various project-specific risks and related mitigants. (10) c. Discuss the socioeconomic advantages of your identified project. (5) Conditions: (a) Physical visit to the project site is a must – originality is required. You need to include project name and the location (city, village, etc.) (b) Any “cut and paste” from resources or information directly from websites will not attract marks. Question 4 (11) You are a Corporate Banker for Geelhout Fabriek, a key client in your bank’s credit portfolio, which is a manufacturer of premium, handcrafted wood furniture. The Head of Credit of your bank would like to know how efficiently the company’s working capital is managed. She is particularly interested in the time it takes Geelhout Fabriek to collect cash from debtors, the total operating cycle, and the working capital (cash) cycle. She is also keen to see how Geelhout Fabriek’s cash cycle compares with the industry average of 90 days. The following information is given: - In recent years, there has been quite a buzz about credit default swaps. The turn of events following the 2008 Global Financial Crisis became a test of the systems that settle credit default swaps. a. Why are credit default swaps (CDS) necessary? (2) b. Why are some investors not in favour of credit default swaps? (2) c. Magong Rural Investments has invested R80m in bonds issued by Moepi Minerals Exploration. Magong Rural Investments has noted that Moepi Minerals Exploration may be experiencing financial difficulties. Therefore, Magong Platinum Project buys R80 m worth of CDS protection on Moepi Minerals Exploration debt, for three years, from the Sedibelo Development Bank, at a premium of 250 bps (2.5%) per annum. Explain the scenarios of default and no default. (6) Question 2 [9] Emfulweni Commercial Bank has a portfolio of debt of three loans totalling R20 million. The following information regarding the loans in the portfolio is provided: Loans Weight Expected return Standard deviation A 45 12% 14% B 20 8% 13% C 35 13% 17% Downloaded by Vusi Xhumalo () lOMoARcPSD| 2025 RSK4804 Assignment 2 It is determined that the covariance between loans A and B is 2%, while the covariance between loans A and C is 4%, and the covariance between loans B and C is 3%. a. Determine the expected return and standard deviation of the portfolio. (8) b. Explain the significance of a credit portfolio beta (1) Question 3 [20] With infrastructure development currently being used to encourage a country’s economic activity, new infrastructure projects are emerging in areas such as energy, water, transport, and telecommunications. You are required to do the following: a. Identify a major project in your area or country and identify the project sponsors, project lenders, and consultants. Write this information down as an answer to this question. (5) b. Discuss the various project-specific risks and related mitigants. (10) c. Discuss the socioeconomic advantages of your identified project. (5) Conditions: (a) Physical visit to the project site is a must – originality is required. You need to include project name and the location (city, village, etc.) (b) Any “cut and paste” from resources or information directly from websites will not attract marks. Question 4 (11) Question 2 [10] The current value of the assets of Mombasa Fish Processing is R200m. The assets are financed by a mix of equity and zero-coupon debt. The current value of the zero-coupon debt is R70m and the final amount to be paid on maturity after six years is R120m, with an effective interest rate of 12.5%. The volatility in Mombasa Fish Processing’s asset value is 23%. The following is required: a. Compute the PD of Mombasa Fish Processing based on the Merton model. b. What is the impact if the volatility suddenly increases to 28%? You are a Corporate Banker for Geelhout Fabriek, a key client in your bank’s credit portfolio, which is a manufacturer of premium, handcrafted wood furniture. The Head of Credit of your bank would like to know how efficiently the company’s working capital is managed. She is particularly interested in the time it takes Geelhout Fabriek to collect cash from debtors, the total operating cycle, and the working capital (cash) cycle. She is also keen to see how Geelhout Fabriek’s cash cycle compares with the industry average of 90 days. The following information is given: - Downloaded by Vusi Xhumalo () lOMoARcPSD| 2025 RSK4804 Assignment 2 Account Opening balance Closing balance a) Inventory 26m 24m b) Accounts receivable 25m 23m c) Accounts payable 16m 18m Net sales during the year were R150m, while the cost of goods sold amounted to 60% of the sales. Interpret the cash conversion cycle if the industry average is 70 days.. Question 3 [25] You are the newly appointed corporate relationship manager at Arcadia Investment Bank. One of your customers has recently recorded a decline in annual turnover, in relation to the prior year. Overall, the business is performing at a significantly lower level of operating efficiency than its peers, as evident from the comparison with industry averages. You also notice that the total asset base of the company has increased while the turnover declined. From the risk perspective, use a SWOT analysis to assess and understand this situation and communicate your decision. NB: You may use a customer in any industry of your choice. a. Do you agree that credit be granted against security, with the knowledge that the same security might be relied upon later to recover debt? Elaborate (2) b. If you were a lender, which form of security would you prefer? Please explain. (4) c. Bank of Napoli has a RAROC hurdle rate of 15% on all lending deals. The amount lent to Donna Bella Boutique is R25m. The risk weight is 100% with capital adequacy of 10%. Accordingly, the capital required for the R25m loan is 2m; hence the target RAROC (as per Bank of Napoli’s credit policy) would be R0.70m (R2m x 35%). However, due to policy issues encountered in real life, the net margin earned on the loan is R0.38m. Donna Bella Boutique is willing to offer deposits as security up to 10% of the facility amount and this can be deployed at 2.5% net margin by Bank of Napoli. Please explore whether this will result in meeting the RAROC hurdle.