Market Risk

You recently read the paper by Sollis (2009) where the author provides introductory
overview of Value at Risk (VaR) and its weaknesses. This encouraged you to
understand more about VaR techniques and on their application. You have therefore
decided to study more on VaR and apply related techniques to compute the risk
exposure faced by a portfolio of real-world financial securities.
In this section of your report, you are therefore required to critically discuss market risk
measurement using Value at Risk 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 a minimum of five real-world companies and the length
of your sample period should be no longer than five years and must end as of 30th
November 2021. Please note your answer should not just be an illustration of the
methods but you should aim to provide interpretations and comparisons capturing your
data and latest published research.
(1,500 words, 50 Marks)
*Sollis, R. (2009). Value at risk: a critical overview. Journal of Financial Regulation and
Compliance.
B. Credit Risk
Analyse a portfolio of loans consisting of 3 companies of your choice with
characteristics shown in table below. For example, if you choose company 1 to be
Tesla, it will have a maturity of 5 years, repayment value of 12 million and annual
interest rate of 6%. All computations must be carried out according to such
characteristics.
Loan Company Name Maturity Repayment Value at
Maturity $m
Annual
Interest
1 Company 1 5 12 6%
2 Company 2 4 10 7%
3 Company 3 3 8 5%
In your report, you should clearly state the composition of your portfolio (i.e., fill in the
table above with the names of three real-world companies).
Assume that all three loans are senior unsecured debt denominated in US dollars and
that the analysis is conducted on 30th November 2021. The loan will be repaid at
maturity date. Clearly state any assumptions you make in your estimations.
Using CreditMetrics (full implementation) and KMV, you are required to compute
relative VaR and Expected Shortfall with MonteCarlo simulation for the portfolio above
at time horizons of 1-year and 2-year periods and confidence interval of 99%.
Interpret, compare, and discuss your results critically. Do a reality check on all the
above calculations. Are your results according to your expectations? Why or why not?
(1,500 words, 50 Marks)
Created in Master PDF Editor
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,
foreign exchange 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 the 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]