banking risk

i want to understand 

1

Assessment Brief

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 3000 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.

Programme: BA (Hons) Finance and Investment Management

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

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

Module Code: AF6003 and LD6008

Module Title: Banking Risk 1

Submission Time and Date: 10th January 2023

Word Limit: 3,000 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.

2

A. Market Risk

In this section of your report, you are required to explain your understanding of VaR techniques
and their application to banking risk management.

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 at least five real-world assets, and the length of your sample period should be no
longer than five years and must end before 31st December 2022.

Please note that your answer should not just be an illustration of the methods, you should aim
to provide interpretations and comparisons capturing your data and the latest published
research.

(1,200 words, 40 Marks)

B.

Credit Risk

You are required to analyse a portfolio of loans consisting of companies of your choice with
characteristics shown in the table below. For example, if you choose company 1 to be
Microsoft, it will have a maturity of 10 years, a repayment value of 20 million and an annual
interest rate of 7%. All computations must be carried out according to such characteristics.

Loan Company Name Maturity Repayment Value at
Maturity $m

Annual
Interest

1 Company 1 10 20 7%

2 Company 2 5 15 3%

In your report, you should clearly state the composition of your portfolio (i.e., fill in the table
above with the names of two real-world companies).

Assume that both loans are senior unsecured debt denominated in US dollars and that the
analysis was conducted on 30th October 2022. The loan will be repaid at the maturity date.
Clearly state any assumptions you make in your estimations. Provide clear illustrations of how
you have derived your results, supported by a clear explanation of each step.

1. Derive loan value distribution using CreditMetrics (full implementation) and compute
relative VaR and Expected Shortfall with Monte-Carlo simulation for the loan portfolio
above at time horizons of 1-year and 2-year periods and the confidence interval of
99%. Interpret the output from a risk management and regulatory point of view,
supporting your claims with relevant literature.

(1200 words, 40 marks)

2. Calculate the Expected Default Frequency (EDF) for both loans using KMV. Compute
the future prices of loans and portfolio risk in the default and no-default scenarios at
time horizons of 1-year and 2-year periods. Interpret the output and compare results
with those obtained using CreditMetrics in part 1. Explain any differences observed
supporting your discussion with relevant literature.

(600 words, 20 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, 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 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]

4

Module Specific Marking Criteria

0 – 29% 30 – 39% 40 – 49% 50 – 59% 60 – 69% 70 – 79% 80 – 90% 90 – 100%

Part A:

Market Risk

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. A
reasonable
understanding of
new developments

Good research and
understanding of
the VaR analysis
by using real-world
asset class. Good
knowledge of new
developments and
good related
examples. Good
understanding of
new developments

Very Good
research and
understanding of
the VaR analysis
by using real-world
asset class. Very
good knowledge of
new developments
and very good,
related examples.
Very Good
understanding of
new developments

Excellent research
and understanding
of the VaR
analysis by using
real-world asset
class. Excellent
knowledge of new
developments and
excellent related
examples.
Excellent
understanding of
new developments

Outstanding
research and
understanding of
the VaR analysis
by using real-world
asset class.
Outstanding
knowledge of new
developments and
Outstanding
related examples.
Outstanding
understanding of
new developments

Exemplary,
sophisticated, and
highly detailed
research and
understanding of
the VaR analysis
by using real-world
asset class.
Exemplary
knowledge of new
developments and
Outstanding
related examples.
Outstanding
understanding of
new developments

Part B:

Credit Risk

Very poor research
and understanding
of the
CreditMetrics and
KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. Very poor
interpretation of
output from risk
management and
regulatory
perspective.

Insufficient
research and
understanding of
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. Insufficient
interpretation of
output from risk
management and
regulatory
perspective.

Reasonable
research and
understanding of
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. A
reasonable
interpretation of
output from a risk
management and
regulatory
perspective.

Good research and
understanding of
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. Good
interpretation of
output from risk
management and
regulatory
perspective.

Very Good
research and
understanding of
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. Very good
interpretation of
output from risk
management and
regulatory
perspective.

Excellent research
and understanding
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. Excellent
interpretation of
output from risk
management and
regulatory
perspective.

Outstanding
research and
understanding of
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. An
outstanding
interpretation of
output from a risk
management and
regulatory
perspective.

Exemplary,
sophisticated and
highly detailed
research and
understanding of
the CreditMetrics
and KMV risk
measurement
approach,
evidence of
calculations, and
understanding of
results. Exemplary
interpretation of
output from risk
management and
regulatory
perspective.

5

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 presentations 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

(i.e.100%) shall be deducted from the assessment mark.

Presentation slides 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.

These provisions apply to all assessments, including those assessed on a Pass/Fail
basis.

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, glossaries, footnotes, tables, figures, and
charts.

Please note that in-text citations [e.g. (Smith, 2011)] and direct secondary quotations
[e.g., “dib-dab nonsense analysis” (Smith, 2011 p.123)] are INCLUDED in the word
count.

The full policy is available here.

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.

https://www.northumbria.ac.uk/about-us/university-services/academic-registry/quality-and-teaching-excellence/assessment/guidance-for-students/

https://www.northumbria.ac.uk/about-us/university-services/academic-registry/quality-and-teaching-excellence/assessment/guidance-for-students/

https://northumbria-cdn.azureedge.net/-/media/services/academic-registry/documents/qte/assessment/guidance-for-students/pl013-v002-word-limits-policy ?modified=20200803200335

https://www.northumbria.ac.uk/about-us/university-services/student-library-and-academic-services/quality-and-teaching-excellence/assessment/guidance-for-students/