Module Financial Risk Management

Module

Financial Risk Management

Please read all questions and information provided carefully. Answer should be made in appropriate length keeping in view the requirement of each question and total word counts allowed.

In addition, your assignment should demonstrate the following qualities:

A critical appreciation of relevant literature and its use to support argument, substantiate calculations and other aspects of the assignment.

Taking ownership of the content, being prepared to debate and argue a personal position, and providing evidence of evaluative skills. A submission made up of extracts from published sources which is descriptive or simply just theoretical regurgitation is not acceptable. Your submission must have interpretation and consideration of the challenges and issues of taking theory into practice.

Logical flow of ideas and treatment; appropriate selection of real world factors related to the companies under scrutiny.

Evidence of additional personal research, and the ability to analyse material from a variety of appropriate relevant perspectives.

Presentation, structure, appropriateness of methodology, breaking into section headings/subheadings, tidiness.

Marks will be awarded for proper referencing and originality of work. Also note that plagiarism is a serious offence and your submission will be electronically checked.

Your report must be handed in electronically

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PART 1 (60 Marks)

Students should answer ALL questions.

QUESTION 1: (15 marks)

Determine and analyse the duration and convexity approach to interest rate risk.

QUESTION 2: (15 marks)

Operational risk can be assessed either by using a quantitative approach. Explain and analyse that statement.

QUESTION 3: (15 marks)

Value-at-Risk (VaR) is defined as the probability of suffering a loss in excess of a given threshold or confidence interval. Can you analyse and appreciate the existing VaR methodologies in terms of market risk evaluation?

QUESTION 4: (15 marks)

The Basel 2 Agreement defines Counterparty Credit Risk (CCR) as the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. Do you think the new Credit Value Adjustment (CVA) methodology is the most appropriate approach to assess the CCR related to over-the-counter transactions?

PART 2 (40 marks)

You have been asked to write a financial risk brief report for National Trust Banking Corporation’s senior management. Your work should both address the bank’s potential concerns and questions, and take into account the fact that your audience’s participants are NOT necessarily risk management experts.

Your brief report will have to answer the following questions:

Determine and analyse the bank’s liquidity risk situation, between 2010 and 2011, by using traditional liquidity ratio analysis, and evaluate its potential change with respect to the new Basel 3 approach of liquidity (See Exhibit 1, 2, and 3).