QUESTION 3 (20 Marks)

3.1 Define a derivative. (3 marks)

3.2 Explain why investors invest in derivatives. (3 marks)

3.3 Establish how forward and future contracts expose investors to counterparty risks. (6 marks)

3.4 Discuss and explain in detail the following derivatives found in financial markets:

3.4.1 Swap agreement (4 marks) 3.4.2 Option contracts (4 marks)

QUESTION 4 (20 Marks)

4.1 Determine the purpose of corporate governance in ERM. (6 marks)

4.2 Establish the requirements for good corporate governance in an organization. (4 marks)

4.3 An organization implements strategies to reach their goals. Each strategy has related risks that must be managed to meet these goals. Following strong corporate governance principles that focus on risk management allows organizations to reach their goals.

You are required to explain the roles of the following functions in a firm related to corporate governance with specific emphasis on risk management recommendations of:

4.3.1 The Board (4 marks) 4.3.2 Management, and (3 marks) 4.3.3 Shareholders (3 marks)

QUESTION 5 (20 Marks)

5.1 Exchange Rate Risk is the risk that an unanticipated weakening in the local currency will adversely affect the firm and vice versa. South Africa uses a floating exchange rate regime and is therefore impacted by foreign exchange risk.

You are required to discuss and explain in detail the THREE (3) types of Foreign Exchange Risks (12 marks)

5.2 Provide FOUR (4) examples of systematic risk. (4 marks)

5.3 Define unsystematic risk (4 marks)