# CREDIT RISK & RISK MANAGEMENT ASSIGNMENT Harvard Case Solution & Analysis

## CREDIT RISK & RISK MANAGEMENT ASSIGNMENT Case Solution

Question 1

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.

1. 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

1.

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.

2.

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. ..............

This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.