Market Risk
A. Market Risk
In this section of your report, you are required to explain your understanding of VaR techniques
and their application to banking risk management.
You are therefore required to discuss market risk measurement using Value at Risk critically
techniques and discuss the new developments, displaying your awareness of the methods
and limitations by presenting clearly how you derived your results. Your portfolio should
consist of at least five real-world assets, and the length of your sample period should be no
longer than five years and must end before 31st December 2022.
Please note that your answer should not just be an illustration of the methods, you should aim
to provide interpretations and comparisons capturing your data and the latest published
research.
Market Risk
(1,200 words, 40 Marks)
B. Credit Risk
You are required to analyse a portfolio of loans consisting of companies of your choice with
characteristics shown in the table below. For example, if you choose company 1 to be
Microsoft, it will have a maturity of 10 years, a repayment value of 20 million and an annual
interest rate of 7%. All computations must be carried out according to such characteristics.
Loan Company Name Maturity Repayment Value at
Maturity $m
Annual
Interest
1 Company 1 10 20 7%
2 Company 2 5 15 3%
In your report, you should clearly state the composition of your portfolio (i.e., fill in the table
above with the names of two real-world companies).
Assume that both loans are senior unsecured debt denominated in US dollars and that the
analysis was conducted on 30th October 2022. The loan will be repaid at the maturity date.
Clearly state any assumptions you make in your estimations. Provide clear illustrations of how
you have derived your results, supported by a clear explanation of each step.
- Derive loan value distribution using CreditMetrics (full implementation) and compute
relative VaR and Expected Shortfall with Monte-Carlo simulation for the loan portfolio
above at time horizons of 1-year and 2-year periods and the confidence interval of
99%. Interpret the output from a risk management and regulatory point of view,
supporting your claims with relevant literature.
(1200 words, 40 marks) - Calculate the Expected Default Frequency (EDF) for both loans using KMV. Compute
the future prices of loans and portfolio risk in the default and no-default scenarios at
time horizons of 1-year and 2-year periods. Interpret the output and compare results
with those obtained using CreditMetrics in part 1. Explain any differences observed
supporting your discussion with relevant literature.
(600 words, 20 Marks)
3
Mapping to Programme Goals and Objectives
Programme (Level) Learning Outcomes that this module contributes to:
Knowledge & Understanding:
• Assess knowledge of contemporary professional practice in business and
management informed by theory and research. [LO1.1]
• Appraise knowledge of business and management to complex problems in
professional practice in order to identify justifiable, sustainable and responsible
solutions [LO 1.2]
Intellectual / Professional skills & abilities:
• Critique creative and critical thinking skills that involve independence, understanding,
justification and the ability to challenge the thinking of self and others [LO 2.2.]
Personal Values Attributes (Global / Cultural awareness, Ethics, Curiosity) (PVA):
• Critique their personal skills and attitudes for progression to post-graduate contexts,
including professional work, entrepreneurship and higher-level study [LO 3.2]
Module Specific Assessment Criteria
Knowledge & Understanding:
• Develop knowledge and understanding of international banking regulation, credit, and
market risks. [MLO1]
• Critically evaluate the measurement models and the management issues in the context
of the regulatory requirements within the banking and finance sector. [MLO2]
Intellectual / Professional skills & abilities:
• You will develop quantitative as well as qualitative skills while measuring and
managing the credit and market risks. [MLO3]
Personal Values Attributes (Global / Cultural awareness, Ethics, Curiosity) (PVA):
• You will be made aware of the risk facing international financial markets and how you
can equip management with the knowledge and expertise to implement stronger
organisational controls to address these risks. [MLO4]
