Question 1 [10] (4) 1. Define credit default swaps (CDS) and why they are necessary. 2. Kitwe Corporation has invested R50m in bonds issued by Mochudi Minerals Exploration. Kitwe is somehow worried that Mochudi Minerals Exploration may be facing a financial crisis. Therefore, Kitwe buys R50m worth of CDS protection on Mochudi Minerals Exploration debt for two years from Peoples Bank at a premium of 200 bps (2%) per annum. Explain scenarios of default and no default. (6) Question 2 [20] 1. What is your understanding of the Basel III Accord? Can financial crises like the 2008 Global Credit Crisis be prevented in future by the Basel III Accord? Explain (10) your views. 2. Stanbo Bank has a credit portfolio of R8bn with an average portfolio PD of 1.2%. The net income or margin is 2.7%. If the portfolio collapses, about 40% of recovery can happen. Therefore, the maximum loss would be R3.2bn (40% x 8bn). Hence, roughly the outcome shows a gain of R216m versus a loss of R3.2bn. Stanbo Bank maintains 10% capital adequacy ratio and the portfolio exposure (RWA) is R8bn. Based on the Kelly Criterion, how much capital buffer should Stanbo Bank maintain? (10) Question 3 (10) What was the main weak point in each American bank's portfolio during 2008 that contributed to scores of failures and bankruptcies? What could you have done as a measure to mitigate against losses? 3 Assignments for RSK4804 TL101/01/2021 Question 4 [10] The following is the balance sheet of Prestige Textile Distributors. Liabilities Assets 25 000 Fixed assets 30 000 12 000 Investments 8 000 Share capital Retained earnings Long-term loan Trade creditors 17000 Stock 16 000 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 working capital requirement. (5) 2. Show the working capital situation if turnover doubles without change in the current terms of trade. Total [50]