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)
3
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).
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)