RSK4804 ASSIGNMENT 2 2025 – FULLY ANSWERED (DUE 30 AUGUST 2025)

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RSK4804 Assignment 2 Memo | Due 30 August 2025. All questions fully answered. Question 1 [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 [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: 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) 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: – 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. TOTAL MARKS: 50