Question 1
a) In the context of financial markets, define a forward contract and explain the
circumstances in which it might be advisable for an organization to enter into
a forward contract.
(4 marks)
b) Discuss at least three types of interest rate derivatives other than swaps and
describe the circumstances in which organizations should consider their
use.
(4marks)
c) Explain CAPM and critically evaluate its use in risk management. Explain
the difference between the systematic risk and the non-systematic risk of
an investment portfolio and discuss the extent to which diversification can
reduce the risk of a portfolio.
(6 marks)
d) Explain the various potential uses of interest rate swaps.
Sample Solution