2 The risk committee at Southern Continents Company （SCC) met to discuss a report by its r

(c) Risk committee members can be either executive or non-executive.

Required:

(i) Distinguish between executive and non-executive directors. (2 marks)

risk committee recently

met to discuss how the company might respond to a number of problems that have arisen with Product 2. After a

number of incidents in which Product 2 had failed whilst being used by customers, Chen Products had been presented

with compensation claims from customers injured and inconvenienced by the product failure. It was decided that the

risk committee should meet to discuss the options.

When the discussion of Product 2 began, committee chairman Anne Ricardo reminded her colleagues that, apart from

the compensation claims, Product 2 was a highly profitable product.

Chen’s risk management committee comprised four non-executive directors who each had different backgrounds and

areas of expertise. None of them had direct experience of Chen’s industry or products. It was noted that it was

common for them to disagree among themselves as to how risks should be managed and that in some situations,

each member proposed a quite different strategy to manage a given risk. This was the case when they discussed

which risk management strategy to adopt with regard to Product 2.

Required:

(a) Describe the typical roles of a risk management committee. (6 marks)

(ii) Evaluate the relative advantages and disadvantages of Chen’s risk management committee being

non-executive rather than executive in nature. (7 marks)

What can we infer from the passage？

A．The Basle Committee's core principles require the minimum capital adequacy requirements.

B．The Basle Committee encourages banks to operate with capital of the minimum.

C．The Basle Committee helps bank supervisors to reduce the risk of loss.

D．The Basle Committee ensures banks to pursue the stability of the banking industry.

ve enterprise risk management system for their firm, Supra Portfolio Managers. Weatherford states that Supra should have a committee in place to respond to violations of risk management guidelines. Washington adds that each asset Supra holds must be investigated thoroughly in isolation so that management can better understand the asset’s risk andreturn characteristics. Which of the following regarding Weatherford’s and Washington’sstatements is CORRECT？

A) Weatherford is incorrect; Washington is incorrect.

B) Weatherford is correct; Washington is incorrect.

C) Weatherford is correct; Washington is correct.

The Seattle Times Company is one newspaper firm that has recognized

the need for change and done something about it. In the newspaper industry,

papers must reflect the diversity of the communities to which they provide

information. It must reflect that diversity with their news coverage 【S1】______

or risk losing their readers' interest and their advertisers' support.

Operating within Seattle, which has 20 percents racial 【S2】______

minorities, the paper has put into place policies and

procedures for hiring and maintain a diverse workforce. The 【S3】______

underlying reason for the change is that for information to b

fair, appropriate, and subjective, it should be reported by the 【S4】______.

same kind of population that reads it.

A diversity committee composed of reporters, editors, and

photographers meets regularly to value the Seattle Times' 【S5】______.

content and to educate the rest of the newsroom staff about

diversity issues. In an addition, the paper instituted a content 【S6】______.

audit (审查) that evaluates the frequency and manner of

representation of woman and people of color in photographs. 【S7】______

Early audits showed that minorities were pictured far too

Infrequently and were pictured with a disproportion number

of negative articles. The audit results from 【S8】______.

improvement in the frequency of majority representation and 【S9】______.

their portrayal in neutral or positive situations. And, with a 【S10】______.

result, the Seattle Times has improved as a newspaper. The diversity

training and content audits helped the Seattle Times Company to win

the Personnel Journal Optimal Award for excellence in managing change.

【S1】

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Futures market

A futures market is basically an organized forum for the trading of futures contracts under highly standardized terms. The basic elements that form this market are discussed below :

Future Exchange[1]

Future exchanges have existed in many countries since the mid-nineteenth century. Today, many futures exchanges all over the world are active in trading futures contracts on vanous commodities and financial instruments, such as stock index futures, agricultural commodities futures, metal futures, energy futures. A futures exchange is usually a membership organization whose purpose is to facilitate the trading of futures contracts. It provides the physical facilities and organizational framework make possible the execution and processing of futures transactions.

Every futures exchange may have its own unique structure. But usually, there is a board of directors , elected by exchange members. The rules, regulations and policies set by the board are implemented by an executive committee, control committee, and new products committee, etc.

Each exchange has a fixed number of memberships. Once all the authorized memberships have been sold, prospective new members must purchase a membership from a current member. Only exchange members must enjoy the privileges: access to the trading area and reduce transaction costs. Non-membership must trade by entering orders through members.

The general responsibilities of a futures exchange include providing:

·An adequate physical location for the trading areas in which members execute transactions ;

·Communications capabilities between the exchange floor and the outside world;

·Procedures that ensure the swift and accurate processing of transactions that take place on the trading floor;

·Effective margining and clearing systems to requirements guarantee the financial integrity of the exchange's contracts ;

·Rules and regulations that meet the requirements of regulatory authorities and that ensure the fair treatment of all market participants;

·Viable futures contracts.

Broker

Broker is an agent as a person or a firm that deals with the futures buying and selling in the futures market for and on the behalf of the customers. The broker must be the member of the futures exchange, if not, he cannot enter the floor for such dealings. The non-membership enterprises or persons that have such dealing desires and needs cannot enter the floor for the transaction either, except that they authorize the qualified broker to enter into a futures contract for them. The broker's remuneration consists of a brokerage, usually calculated as a percentage of the sum involved in the contract but sometimes fixed by a tariff. Brokers are used because they have specialized knowledge of certain markets.

The Clearing House[2]

Clearing house is a centralized system for settling indebtedness between members. Every futures exchange has a clearing house, in which sales and purchases are registered with the clearing house for settlement at the end of the accounting period. The structure of a clearing house varies from exchange to exchange. A clearing house may be a distinct entity with its own staffs and boards that do not overlap with its related exchange. For instance, the London International Financial Futures and Options uses the London Clearing House. Some clearing houses are part of the exchanges. For example, the clearing entity is a department within Chicago Mercantile Exchange and New York Mercantile Exchange.

Membership in a clearing house is available only to members of the related exchange and only to those who can meet strict financial requirements. These stringent financial requirements are necessary because it is the collective strength of the clearing house members that ultimately guarantees the financial integrity of all the trades carried out on the affiliated exchange. A member of exchange may transact business on the floor of that exchange for himself and for others. However, if the exchange member is not a member of the clearing house, all transactions must be cleared through a clearing member by paying certain fee. That is to say, the non-clearing member maintains an account with the clearing member and all trades of non-clearing member are held in that account. The clearing member should be responsible for the performance of these trades. The clearing house interposes itself between the buyer and the seller: the buyer has a contract with the clearing house and not directly with the seller, and the seller now has a contract with the clearing house and not with the buyer. The clearing house is not only the buyer of all the contracts, but also the seller of all the contracts. In consequence, futures traders do not need to worry about the credit risk of the other party with whom they are dealing. This greatly simplifies the administration of futures contracts, as every contract is with the clearing house. It also has the major benefit of standardizing and reducing the default risk of a futures contract.

The function of the clearing house is realized only by the guarantee of the margin system. Futures margin is a faith deposit regulated by the clearing house. It is intended to protect the seller against the buyer's default if prices fall and the buyer against the seller's default if prices rise.

Two kinds of margin are commonly used by clearing houses:

·Original Margin or Initial Margin.[3] Original margin is the deposit that must be made when a futures position is initiated. It generally ranged from about 2o-/o to lOu/o of the value of the futures contract.

·Variation Margin or Call Margin.[4] To minimize the losses from any default, changes in the price of futures contracts are settled on a daily basis. This is called marking to the market. Each day, at the close of trading, the change in price of a futures contract during that day is calculated. If the price changes should be adverse to the trader's position, then his original margin will be reduced. A1l exchanges require that once a trader's original margin is reduced to a certain level, known as the maintenance margin, additional funds must be paid to the clearing house to keep his original margin at the normal level. This payment is called variation margin.

Participants

According to their location, participants can be divided into those who trade on the floor of the exchange and those who do not. Floor traders can be f'urther divided into those who trade on their own account and those who trade on behalf of others. In the United States, brokers are also called futures commission merchants or FCMs. Some brokers may also trade for their own accounts. According to their motive for futures trading, participants may be split into two kinds: those who use futures market to reduce his exposure to price changes and those who attempts to profit by correctly anticipating price movements and trading accordingly.

[1]期货交易所

[2]清算所

[3]初始保证金

[4]追加保证金

Questions for reading :

A.1

B.2

C.3

D.4

iplying the country default spread by the volatility of equity markets, relative to the volatility in government bonds in that market. Assume that your estimate for a mature market equity risk premium is 6%, that the default spread for Indonesia is 2% and that the standard deviation of Indonesian equities is 24% （）. Estimate the total equity risk premium for Indonesia

A．12%

B．8%

C．10%

D．6%

E．4%