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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)
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]

Sample Solution

nalysing the sonnet on its meter showed that it is in iambic pentameter and varies occasionally using an initial reversal in line 2 and mid-line reversals in lines 3, 4 and 12 thereby Shakespeare achieves a change in rhythm and builds up tension to create a faster or slowing movement. He also uses commas to give the reader some guidance and emphasise the depiction of his mistress in line 3 to 4 and more important to create pauses in performance in the rhyming couplet “And yet, by heaven, I think my love as rare” (Sonnet 130 line 13). This does not seem to contradict the sonnet form, not even the Shakespearean form. After pointing out the meter of the sonnet I would like to shed some light upon each quatrain and show the overall image that is being created. The typical Blazon to me seems to describe the loved one from head to toe as if the poet was gazing along the loved one’s body. My assumption, to me, is substantiated by the very first line and the appearing movement of the sonnet from her eyes in line 1, that are ‘nothing like the sun’, to her lips that are in no way as red as coral, to her hair (in this context supposedly on her shoulders) in line 3. Following this line 11 and 12 describe her walks on the ground in a treading manner. The first quatrain is written in a negative tone and describes the mistress body in 3rd person narrative. In line 1 he uses assonance that creates a melody with the words my, eyes, and like and implements the negative simile in “nothing like the sun” – a strong anti-Petrarchan image (line 1). Line 2 further plays with the comparisons of that time by comparing her lips red to that of coral, that his mistress apparently does not possess. A parallelism is to be observed in lines 3 and 4, not only at the beginning of the line but their syntactical structure as well. Overall, I perceive a shift in described colour from line 1 “nothing like the sun” followed through in line 2 “her lip’s red” continuing to line 3 “if snow be white, why her breast are dun” into line 4 “black wires” (lines 1-4) to more darker shades that perhaps represent the Dark Lady. Quatrain 2 changes the perspective as the narrator speaks in 1st person. The damasked roses belong to the semantic field of love and are typical Petrarchan imagery as well as the negative comparison of her breath to the delight of perfume. Alliteration is also dominant in line 7 with words like than, the, that, (and enjambed into line 8) there. Quatrain 3 beginning with the Volta, has a subtle shift of tone and perception, since it begins with “I love to hear her speak, yet well I know”, however turns again in line 10 as the narrator states that “music hath a far more pleasing sound”, perhaps stating that he likes the content of her utterances rather than the sound of her voice itself (line 9-10). Line 11 and 12 employ again a Pe
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