Market Risk Estimation

Market Risk Estimation

Instructions on Assessment

The assessment for this module is by means of an assignment and 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 3000 words (with a tolerance level of 10%) which must be stated at the cover page of the assignment.
• Font – Arial 12, whole document being justified on both sides with 1.5 line spacing.
• Titles and headings should be in bold. Section headings should be numbered e.g. 3.1.
• Referencing must be as follows:

McMath, M. (2016) Liquidity mismatch and maturity transformation: a study on the UK banks, International Journal of Risk and Return, Vol. 11(7), pp. 21-29

• Citation should be as:

McMath (2015) and if more than two authors should be as McMath et al., (2015)

• 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.
• If you are attaching any appendices, please keep it to the minimum.

Assessment Questions:

Part A: International Banking Regulation                                    

1. Critically discuss the significance of capital adequacy requirements of Basel III in making the banks safer. Support your arguments with relevant literature.

(750 words, 20 marks)

Part B: Market Risk Estimation

2. You must select 5 corporations of your choice from the same industry. Assume that the analysis is performed on October 1^st, 2020. All the data you need to collect must be consistent with this date.

Compute VaR of your portfolio using Variance-Covariance, Historical Simulation and Monte-Carlo methods. Time horizon 1 year. Confidence interval 99%. Calculate the Expected Shortfall. Present your results and discuss the findings.                                                                                                     (750 words, 20 marks)

Part C: Foreign Exchange Risk

3. Discuss with examples the types of foreign exchange risks faced by Financial Institutions. Also, illustrate the hedging strategies used for foreign exchange risk.

(750 words, 20 marks)

Part D: Credit Risk

4. Discuss Creditmetrics approach to calculating credit risk. What are benefits and shortcomings of the model? Suggest improvements in the model. (750 words, 20 marks)

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]

Module Specific Marking Criteria

 

	0 – 29%	30 – 39%	40 – 49%	50 – 59%	60 – 69%	70 – 79%	80 – 90%	90 – 100%
Part A; International Banking Regulation   Maximum Mark= 20	Very weak research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Insufficient research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Reasonable research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Good research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Very Good research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Excellent research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Outstanding research and understanding of the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.	Exemplary, sophisticated and highly detailed research and understanding the Basel 3 regulation and discussion on the role of capital requirements in making banks safer.
Part B; Market Risk   Maximum Mark= 20	Very weak, research and understanding of the VaR analysis and little attempt to provide an example.	Insufficient research and understanding of the VaR analysis. The use of real-world asset class is incorrect or incomplete.	Reasonable research and understanding of the VaR analysis with an attempt to illustrate real world numerical examples.	Good research and understanding of the VaR analysis by using real world asset class.	Very Good research and understanding of the VaR analysis by using real world asset class.	Excellent research and understanding of the VaR analysis by using real world asset class.	Outstanding research and understanding of the VaR analysis by using real world asset class.	Exemplary, sophisticated and highly detailed research and understanding of the VaR analysis by using real world asset class.
Part C; Foreign Exchange Risk   Maximum Mark= 20	Very weak research and understanding of the types of foreign exchange risks and hedging strategies.	Insufficient research and understanding of the types of foreign exchange risks and hedging strategies.	Reasonable research and understanding of the types of foreign exchange risks and hedging strategies.	Good research and understanding of the types of foreign exchange risks and hedging strategies.	Very Good research and understanding of the types of foreign exchange risks and hedging strategies.	Excellent research and understanding of the types of foreign exchange risks and hedging strategies.	Outstanding research and understanding of the types of foreign exchange risks and hedging strategies.	Exemplary, sophisticated and highly detailed research and understanding of the types of foreign exchange risks and hedging strategies.
Part D; Credit Risk   Maximum Mark= 20	Very weak research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.	Insufficient research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.	Reasonable research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.	Good research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.	Very Good research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.	Excellent research and understanding of the Creditmetrics  risk measurement approach, its benefits and shortcomings and possible improvements.	Outstanding research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.	Exemplary, sophisticated and highly detailed research and understanding of the Creditmetrics   risk measurement approach, its benefits and shortcomings and possible improvements.