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FRA Assignment

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anas
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Final Assignment

By:
Emaad Farid (2011149)

Assigned By:
Sir Syed Feroz Aziz

Subject:
Financial Risk Analysis

Fall 2023

Shaheed Zulfiqar Ali Bhutto Institute of Science & Technology


(SZABIST)
Investigating the role of risk assessment tools and techniques in identifying
and mitigating risks

Effective use of risk management tools and techniques can play a very crucial role in
identifying and mitigating risk. It helps investors and businesses prevent potential losses and
adverse financial outcomes. Examples of such tools and techniques, as well as their roles, are
as follows:

Financial derivatives
These are instruments whose value is derived from the value of an underlying asset.
These tools are used to determine and mitigate market risk. The tools are as follows:

● Future Contract: This is an agreement that is done between two parties who
agree to buy or sell a particular asset on a future date that is specified.
Investors can purchase the right to buy or sell at a future date at a
predetermined price. An investor who purchases the right to buy expects to
profit from an increase in price while an investor who purchases the right to
sell, expects to profit from the price decrease. An example can be an airline
company, that is concerned about the rise in fuel prices, so it enters into a
future contract for the purchase of fuel at a predetermined price. If the fuel
price rises, as expected, the airline company can still purchase the fuel at the
predetermined price set in the contract.

● Forward Contract: It is a contract between two parties to buy or sell an asset


at a specified future date at a predetermined price. The two parties involved
are the buyer (long position), and the seller (short position). An example can
be a farmer who is concerned that the price of wheat might drop at the time of
harvesting, so he can enter into a forward contract with a bakery to sell them
wheat on a future date at today's price. So if the price of wheat decreases in the
future, the bakery is obliged to buy the wheat at the predetermined price and
prevent the loss of the farmer. This tool helps to minimize risks and avoid
uncertainties in the future.

● Option contract: it is an agreement which grants the buyer the right to buy or
sell an asset at a strike price on or before they specified date. There are two
types of options:

(i) call option: Gives the buyer the right to buy the asset at the agreed-upon
price.
(ii) put option: Gives the buyer the right to sell the asset at the agreed-upon
price.
It plays a crucial role in risk management by providing investors with the
flexibility to hedge against potential losses. It allows the holder to buy or sell
an asset at a predetermined price before a specified expiration date. Investors
can use options to protect their portfolios from unexpected market movements.

● Swap contract: A swap contract is a financial agreement between two parties


to exchange cash flows over a specified period. The most common type is an
interest rate swap, where parties exchange fixed and variable interest
payments. For example, if one party has a fixed-rate loan but prefers variable
rates, and the other has the opposite preference, they can swap payments to
better align with their needs. Other examples include currency swap and total
return swap. Swap contracts are like financial tools that help businesses and
investors deal with risks. They allow parties to swap cash flows and adjust
how exposed they are to different financial uncertainties. For example, in
interest rate swaps, it protects investors from unpredictable changes in interest
rates. It's a way for them to customize their cash arrangements to fit their
comfort with risk and what they think will happen in the market. By using
these swap contracts, they can handle unexpected changes in the market better
and navigate through financial uncertainties more effectively.

Value-at-Risk (VaR)
This is a statistical tool that is used to determine the risk in an investment portfolio
over a particular period. It shows the maximum loss that could occur in a particular
portfolio investment and helps investors make a decision to invest or not.
VaR has some benefits, it is easy to use as just a single number indicates the potential
risk in a portfolio and it is measured in price units or percentages which makes it
easier to understand. Moreover, VaR can be applied to all kinds of assets and it is also
widely used and is an accepted standard in buying and selling.
Examining the effectiveness of risk management framework applied for
different industries working in Pakistan.

1) Bank AL-Habib Ltd.


Summary of Ratios:

Names Ratios

P/E Ratio 2.70

Price to Sales Ratio 0.28

Price to Book Ratio 0.64

EPS 15.01

Receivables Turnover -

Total Asset Turnover 0.11

Current Ratio 0.14

Quick Ratio -

Return on Assets 0.81

Return on Equity 17.95

Return on Total Capital 8.03

Return on Invested Capital 6.24

Total Debt to Total Equity 514.76

Total Debt to Total Capital 83.73

Total Debt to Total Assets 21.66

Long-Term Debt to Equity 156.73

Long-Term Debt to Total Capital 25.49

Long-Term Debt to Assets 0.07


2) MCB Bank Ltd.
Summary of ratios:

Names Ratios

P/E Ratio 3.24

Price to Sales Ratio 0.56

Price to Book Ratio 0.71

EPS 29.00

Receivables Turnover -

Total Asset Turnover 0.11

Current Ratio 0.14

Quick Ratio -

Return on Assets 1.56

Return on Equity 18.55

Return on Total Capital 13.87

Return on Invested Capital 10.08

Total Debt to Total Equity 212.65

Total Debt to Total Capital 68.02

Total Debt to Total Assets 18.12

Long-Term Debt to Equity 83.95

Long-Term Debt to Total Capital 26.85

Long-Term Debt to Assets 0.07

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