Estimate the change in market risk of your portfolio during the crisis using Value at Risk (VaR) techniques and the Expected Shortfall.

Assessment Brief

Programme:

BSc (Hons) Finance and Investment Management

BA (Hons) International Banking and Finance (Top-up) BA (Hons) Business and Finance (Top-up)

Module Code:

AF6036_LD6077

Module Title:

Risk in Financial Institutions I

Submission Time and Date:

16th January 2024

Word Limit:

2500 words

Weighting

This assignment accounts for 80% of the total mark for this module

Submission of Assessment

Electronic Management of Assessment (EMA): Please note that your assignment is submitted electronically online via Turnitin by the given deadline. You will find a Turnitin link on the module’s ELP site.

It is your responsibility to ensure that your assignment arrives before the submission deadline stated above. See the University policy on late submission of work.

Instructions on Assessment

This assignment accounts for 80% of the overall mark for the module. You must attempt all the parts to meet the learning outcomes.

·Length maximum of 2,500 words (with a tolerance level of 10%), which must be stated at the cover page of the assignment.

·Quotations of more than 2 lines must be indented and in italics with the reference and page number stated.Shorter quotations should be in italics but do not need to be indented.

·Tables and diagrams should be inserted at an appropriate point in the text and should be easily readable.

·All the results, their interpretation and discussion should be provided in a single MS Word document.

A.Market Risk

In this section of your report, you are required to analyse the market risk of a portfolio in a calm and crisis period. To achieve this, you can choose a crisis period of your choice (e.g., global financial crisis, sovereign debt crisis, COVID-19).

Create a portfolio consisting of four real-world assets. Choose an appropriate sample period to allow you to divide the sample into “Before Crisis” and “During Crisis” periods. The choice (and division) of the sample periods should be appropriately justified in the report.

You are required to complete the following tasks.

1.Estimate the change in market risk of your portfolio during the crisis using Value at Risk (VaR) techniques and the Expected Shortfall. Critically discuss the drivers that led to this change in the market risk of the portfolio during the crisis period.               (25 marks)

2.Based on the above market risk analysis, propose market risk management strategies for your portfolio.Your discussion should be clearly linked with your market risk analysis and be undergirded with relevant literature                                                  (15 marks)

B.Credit Risk

You are required to analyse a portfolio of loans consisting of four companies of your choice. In your report, you should clearly state the composition of your portfolio (i.e., fill in the table above with the names of four real-world companies). All computations must be carried out according to such characteristics.

Loan

Company Name

Time to Maturity

Repayment Value           at Maturity $m

Annual Interest

Credit Rating

1

Company 1

 

 

 

 

2

Company 2

 

 

 

 

3

Company 3

 

 

 

 

4

Company 4

 

 

 

 

Assume that the loans are senior unsecured debt denominated in US dollars and that the analysis was conducted on 31st October 2023. Clearly state any assumptions you make in your estimations.

1.Estimate the probability of default (PD) for each loan and the overall portfolio by using the probit model. Interpret and discuss the output.                                                                                                             (15 marks)

2.Using the PD from above, calculate the Expected Loss at Maturity (ELM) for each loan and the portfolio. Interpret the output from a risk management and regulatory point of view, supporting your claims with relevant literature.                                                                                                         (15 marks)

3.Discuss the KMV approach to calculating credit risk. What are the benefits and shortcomings of the KMV model as compared to the ELM methodology used above?

(10 marks)

C. Liquidity Risk

1.Critically evaluate the liquidity risk of a systemically important bank of your choice using appropriate measurement tools. Provide recommendations to manage such risk.

(20 marks)

Mapping to Programme Goals and Objectives 

Programme (Level) Learning Outcomes that this module contributes to:

Knowledge & Understanding (KU):

·Appraise knowledge of contemporary professional practice in business and management informed by theory and research (PLO1).

·Appraise knowledge of business and management to complex problems in or related to professional practice in order to identify justifiable, sustainable and responsible solutions (PLO2).

Intellectual / Professional skills & abilities (IPSA):

·Evaluate effective interpersonal communication skills and the ability to work in multi-cultural teams (PLO3).

Personal Values Attributes (PVA):

·Critique creative and critical thinking skills that involve independence, understanding, justification and the ability to challenge the thinking of self and others (PLO4).

Estimate the change in market risk of your portfolio during the crisis using Value at Risk (VaR) techniques and the Expected Shortfall.

Module-Specific Assessment Criteria

Knowledge & Understanding (KU):

·Develop a knowledge and understanding of capital risk in financial institutions arising from credit, market and liquidity risk. (MLO1)

·Critically evaluate measurement models and management issues in the context of the regulatory requirements within the banking and finance sector. (MLO2)

Intellectual / Professional skills & abilities (IPSA):

·Develop quantitative and qualitative evaluation skills whilst measuring and managing the risks covered in this module. (MLO3)

·Develop an ability to apply regulatory requirements to real-life banking and financial institution scenarios (MLO4)

Personal Values Attributes (PVA):

·Develop an awareness of the risks facing international financial markets and how management can be equipped with knowledge and expertise to implement stronger organisational controls to address risks. (MLO5)

Assessment Regulations

Please read the guidance for students regarding assessment policies. They are available online here.

Late submission of work

After the published hand-in deadline, the following penalties will apply where coursework is submitted without approval.

For coursework submitted up to 1 working day (24 hours) after the published hand-in deadline without approval, 10% of the total marks available for the assessment shall be deducted from the assessment mark.

Coursework submitted more than one working day (24 hours) after the published hand-in deadline without approval will be regarded as not having been completed. A zero mark will be awarded for the assessment, and the module will fail, irrespective of the overall module mark.

The full policy can be found here.

Word limits and penalties

No penalty will apply if the assignment is within +10% of the stated word limit. The word count should be declared on your assignment`s front page and cover sheet. The word count does not include appendices, glossary, footnotes, tables, figures and charts.

Please note that in-text citations [e.g. (Smith, 2022)] and direct secondary quotations [e.g., "dib-dab nonsense analysis" (Smith, 2022 p.123)] are INCLUDED in the word count.

The full policy is available here.

Based on the above market risk analysis, propose market risk management strategies for your portfolio.Your discussion should be clearly linked with your market risk analysis and be undergirded with relevant literature 

Academic Misconduct

The Assessment Regulations for Taught Awards (ARTA) contain the Regulations and procedures for cheating, plagiarism, and other forms of academic misconduct. The full policy is available here.

You are reminded that plagiarism, collusion, and other forms of academic misconduct, as referred to in the Academic Misconduct procedure of the assessment regulations, are taken very seriously. Assignments in which evidence of plagiarism or other forms of academic misconduct is found may receive a mark of zero.

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