CREDIT RISK & RISK MANAGEMENT ASSIGNMENT Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

CREDIT RISK & RISK MANAGEMENT ASSIGNMENT Case Solution

RISK MANAGEMENT TASK

Question 1

The total profit (loss) of the fund over the three months trading horizon when the market is in Contango would be as follows:

Beginning of month	1	2	3	4
One month future price	52	59	60	62
Spot price	50	57	59	60

Expected Profits	-	5	0	0
Expected Profits (loss)	5

Since the expected profit is $5, therefore these returns exceed the actual change in the price of the oil over this three months period.

The total profit (loss) of the fund over the three months trading horizon when the market is in Backwardation would be as follows:

Beginning of the month	1	2	3	4
One month future price	48	55	58	58
Spot price	50	57	59	60

Expected Profits	-	9	4	2
Expected Profits (loss)	15

Since the profit is $15, therefore it is greater than the actual change in spot price of oil over these three months trading period.

Question 2

The range of the values which would result in the largest payoff at maturity for the short target forward at delivery price of $103, rather than a delivery price of $100 for short vanilla forward contract, would be $100 to $103.

The payoffs by combining a short plain vanilla forward and a short plain vanilla call option would be the same as the payoffs for a target forward with a delivery price of 103 as shown in the table below:

Position	Payoff if St<103	Payoff if St>=103
Short forward	100	100
Short Call	0	3
Total	100	103

3 The decomposition of the target forward in the previous part tells that the value of the call option which is embedded in it is exactly 0. ..............

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