Financial Risk management Assignment Write an essay addressing the following questions. 1. Assume that you are the financial manager of a British firm which has a subsidiary in Germany producing for a...

1) The European debt crises are the name given to the situation which arises in Europe because
of Europe’s struggle to pay that debt which had taken in past years. It arises in different five
countries – Greece, Portugal, Ireland, Italy and Spain which a failed to produce adequate
economic growth to make them able to pay back the different bondholders their investment
amount. However this crisis mainly arises in these five countries but it affects the whole world.
According to the head of the Bank of England “the euro crisis is the most serious financial crisis
at least since the 1930s, if not ever,”
In 2008-2009, since the U.S financial crises occurs the whole world economy has experienced
very slow growth. Greece was one of the principal nations which experienced slow growth rate.
As of slow growth rates it affects revenues and profits of different firms operating in countries
due to which tax collections become very low making high budget deficits.
As the financial reserves (savings − retained earnings) of the firm are held in part in 5 year
German government bonds and in 5 year Greek government bonds. The firm is exposed to many
risks like:-
Credit Risk: - Credit risk means default risk. It means when there is risk of borrower going into
default i.e. not able to pay back the money. Because of euro crisis government is having very
high deficits therefore is unable to repay the debt taken in form of bonds.
Market Risk: - This is the risk related to fluctuations in value of portfolio which include different
investments. Fluctuations are mainly because of change in market factors. Euro crisis is one of
the main factors because of which there is risk of decrease in value of bonds.
Liquidity Risk :- In euro crisis government is having very high deficits and therefore there is
always default risk of bonds in the market due to which liquidity risk also arises in market that is
bonds are not so much liquid and it is very difficult to convert them into cash .
Different financial derivatives used to hedge risks of euro crisis:-
 Credit Default Swaps (CDS) – In this buyer purchases a contract and makes regular
payments to other person. In case of default, buyer receives money (compensation) from
seller of contract.
 Credit Linked Note (CLN):- it covers specified credit risk on investments. In this investor
gets high rate of return for accepting high risk .It provides hedge to borrowers against
explicit risk. Credit linked Note is created by a trust using very low- risk securities as
collateral security.
2)
(a) Due to Euro Crisis there are many risks which are involved in Euro crisis affecting this
assignment
o Foreign Exchange risk: It is related with possible fluctuations in the foreign exchange
value of a currency. There are two major types: translation risk and transaction risks.
Because of Euro crises exchange rates are becoming very high i.e. euro is becoming
cheaper because of this there is always risk of high fluctuations in foreign exchange and
also...