ASSIGNMENT 02 Due date: 23 August 2023 Unique number 894155

Aim: To evaluate your knowledge of some of the fundamental aspects of credit risk management.

Answer the following questions and submit your assignment on myUnisa, at https://my.unisa.ac.za. Limit your assignment to a maximum of six pages.

Use Times New Roman, font size 12.

Question 1 [15]

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.

1. Define credit default swaps (CDS) and why they are necessary. (4)

2. What are advantages and disadvantages of CDS? (5)

3. Walvis Corporation has invested R75m in bonds issued by Mashava Oil Exploration. Walvis is somehow worried that Mashava Oil Exploration may be facing a financial crisis. Therefore, Walvis buys R75m worth of CDS protection on Mashava Oil Exploration debt for two years from Gweru Investment Bank at a premium of 250 bps (2.5%) per annum.

Explain scenarios of default and no default. (6)

Question 2

[5] 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? RSK4804 Assignment 2

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