Assessment Brief

1. What is the purpose of this assessment?

The following table shows which of the module learning outcomes are being assessed in this assignment. Use this table to help you see the connection between this assessment and your learning on the module.

Module Learning Outcomes being assessed

By the end of the module, it is expected the students will:

• Implement several techniques to measure market and credit risk: Value-at-Risk and expected shortfall of a portfolio of assets under normality and without distributional assumptions; measuring credit risk as in the JP Morgan’s RiskMetrics model.

• Assess the accuracy/reliability of a Value-at-Risk estimates (Backtesting) and apply risk management tools such as Component VaR and Best Hedge.

• Describe and discuss bank capital, risk and the difference between economic and regulatory capital, the latest bank capital regulation, credit rating systems, and stress testing, and the overall global context.

• Work together to develop team-building skills, appreciate and value diversity and multiculturalism.

2. What is the task for this assessment?

Task (attach an assignment brief if required)

In this project, you are required to address all the questions listed below. For questions 1, 2, and 3, you will analyse a portfolio of sovereign loans as outlined in Appendix A (attached on the blackboard). Assume that your analysis is based on data from the close of business on 30th September 2024. All data collected must align with this date. Additionally, specify any assumptions you make to complete your calculations, and provide a rationale for why you believe these assumptions are reasonable.

1. Using the information collected for your group presentation, write a summary of the macroeconomic challenges faced by each country in your portfolio (max 200 words per country). Be sure to highlight any changes that have occurred since the presentation and include your reflections on those developments (max 100 words). [10% weight]

2. Calculation of the risk of a sovereign loan portfolio. [30% weight]

a. With the CreditMetrics model compute 95%, 99% and 99.9% relative (from the mean) VaR and ES for the portfolio of sovereign loans assigned to your group (see Appendix A). Use a time horizon of 1 year, 10,000 Monte Carlo simulations and a 30% asset correlation.

[Note: Relative VaR in CreditMetrics is computed as E(V)-V* where E(V) is the expected value of the 1-year forward portfolio value and V* is the simulated 1-year forward portfolio value at the 5%, 1% and 0.1% percentiles, respectively. Relative expected shortfall is computed as E(V)-V** where V** is the average of the 1-year forward portfolio values below V*. ]

b. Explain why you think that your results are plausible.

Portfolios are composed of exposures to Turkey, Argentina, Brazil and Venezuela. To implement CreditMetrics you will need the following information:

i. Zero coupon government yields. You may obtain yields from Bloomberg, Eikon/Datastream, or other services. The yields for the relevant maturities in your analysis can be derived by interpolation in case of need. Assume that all yields refer to debt denominated in US dollars. If instruments and data are not available in the market, please make reasonable assumptions and explain your choices.

ii. Country ratings should be sourced via the Moody’s website. Simply look up a rating from the research tab. You will need to register with Moody’s to have access to the rating information. Registration is free.

iii. Sovereign default rates and recovery rates can be obtained from the document “Sovereign Default and Recovery Rates, 1983-2023” which can be downloaded from the Moody’s website. In case information is not available, you will need to make reasonable assumptions and explain their rationale.

3. Stress testing: Compute the 95%, 99% and 99.9% relative VaR and ES for your portfolio under the following stress scenarios. Consider the effect of each scenario separately and then all combined. [20% weight]

Scenarios:

a. Assume all the sovereigns represented in your portfolio are all downgraded to C. If the sovereigns have already both C rating, you can use a different rating of your choice, and explain your assumption and calculations.

b. Assume that yields increase by 10 percentage points across all maturities (i.e. if a current yield is 7% it will go to 17%).

c. Assume asset correlation goes to 80%. If the correlation is already 80%, assume that the correlation increases by 10%.

d. Explain why you think that your results in all the above points are plausible.

4. Review the IMF’s Regulatory reform. 10 years after the global financial crisis: looking back, looking forward and other relevant material on the topic which can be drawn from academic papers, (e.g. from Science Direct or University of Reading Library) industry papers (e.g. from regulators and practitioners) and the financial press. Answer the following questions: [40% weight]

a. What is your assessment of the capital and leverage regulation that was introduced following the financial crisis? (max 400 words)

b. What is your assessment of the systemic risk regulation that was introduced following the financial crisis? (max 400 words)

c. In your opinion, what are the main regulatory challenges going forward? (max 400 words)

d. In your opinion, why can FinTech have important risk management implications for financial institutions? (max 400 words)

Include the word count for each sub-question. In your response to each sub-question, incorporate a figure or table that effectively illustrates one or more of the key points being discussed. Figures and tables may be sourced from existing published material (with proper citation in the figure/table legend) or created by you using data from sources such as Bloomberg, Eikon, Datastream, or other relevant services. Note that the tables and figures should not be counted in the word count.

If you have queries concerning the project you can contact us via email or during office hours. Please bear in mind that data collection is your responsibility and forms part of the assessment for your project.

Please see the attached 2024-2025 MoR Group Project file for Appendix A.

3. What is required of me in this assessment?

Guidelines/details of how to prepare your submission

What works you should submit?

There are two documents we’re expecting you to submit for this group project.

1. Submit an Excel spreadsheet containing all your calculations. The spreadsheet should be well-organized and easy to follow. It must also include all the raw data specified in the data section below. Be sure to provide the data sources and identifiers (e.g., DataStream or Eikon security codes) to allow for verification. Clearly explain your process within the spreadsheet, labelling data and results, and providing comments on your calculations. If any assumptions are made regarding the data, clearly state and justify them.

2. Submit your report in a written document. Provide a Word/PDF document containing separate responses to questions 1-4. The document should be self-contained, meaning the reader should not need to refer to the Excel file. All key results discussed should be reported and summarized within the Word/PDF document. Each answer must be clearly labeled with the corresponding question or sub-question number. The document should be written professionally in the format of a risk management report.

Both files must be submitted via Blackboard before the submission time. To submit, navigate to the "Assessment" folder in the Management of Risk module, select "Group Project," and upload the files. Instructions on how to do this are available under the "student support" tab in the "Submitting work online via the Blackboard Assignment tool" section. Ensure that the group number and the names of all group members are clearly stated on all documents.

One group member should submit both the Excel and Word/PDF files on behalf of the group. If needed, you can revise your submission until the deadline.

Self regulation: Make sure that you…

• Establish clear roles and responsibilities: Assign tasks based on each member's strengths and interests to ensure an efficient workflow.

• Set deadlines early: Break down the project into smaller tasks with internal deadlines to avoid last-minute rushes.

• Communicate regularly: Use tools like messaging apps, online meetings, or discussion boards to stay in touch and update each other on progress.

• Be respectful and inclusive: Encourage open dialogue and make sure everyone’s ideas are heard, valuing diverse perspectives.

• Hold each other accountable: Regularly check in on task completion and offer help if someone is struggling.

• Stay organized: Keep a shared document or folder for all materials, and label everything clearly to avoid confusion.

• Resolve conflicts early: Address any disagreements or misunderstandings as soon as they arise to prevent issues from escalating.

• Review the final work together: Ensure everyone reviews the project before submission to confirm quality and consistency.

• Stay flexible: Be open to adjusting the plan or taking on new tasks if necessary to ensure the project’s success.

• Reflect on group dynamics: After the project, discuss what worked well and areas for improvement in future collaborations.

Three key pieces of advice based on the feedback given to the previous cohort who completed this assignment

• Avoid leaving tasks until the last minute before the deadline.

• Regularly meet with other group members, either in person, online, or via calls, to track progress.

• Ensure the submitted document is well-organized and clear.

Formatting Guidelines

• The spreadsheet must be well-organized and easy to read. It should include all the raw data specified in the data section below, with data sources and identifiers (e.g., securities codes) clearly provided for verification purposes. Ensure the spreadsheet clearly explains the process, with data/results properly labelled and calculations commented on.

• The Word document should be self-contained, meaning the reader should not need to refer to the Excel file. All key results discussed in the document must be summarized and reported within it. Each response should be clearly labelled with the corresponding question or sub-question number.

Word limit/guidance and penalty applied

Your risk report should consider beginning with a title page and an executive summary, main body where you discuss the questions list before. Analysis and results should be presented with supporting tables, graphs, and figures, and are discussed with consideration of resources (references), assumptions and limitations. Any citations need to include in the references. The document is written in a professional tone, with clear labelling, organized content, and well-presented visual aids to ensure clarity and ease of understanding.

We will only consider the last submission received before the deadline.