Risk Management & International Finance (BFBL606) Coursework for 2016/17 Page 1 of 6
RISK MANAGEMENT AND INTERNATIONAL FINANCE (BFBL606)
Coursework for the 2016/17 Academic Year
Important things to remember:
This coursework is due on Monday 30TH MARCH 2017, BEFORE 13:00 (1PM).
Students are required to submit the WRITTEN REPORT online via TURNITIN.
Students are required to submit the EXCEL FILE with their calculations ONLINE using the tool provided. Groups that fail to submit this file will be heavily penalised.
Before submission, you MUST label your files as “BFBL606 [Insert Name]”, e.g. “BFBL606 Stefan van Dellen.pdf” or “BFBL606 Stefan van Dellen.xlsx”.
There is NO WORD LIMIT for this coursework.
Feedback on the coursework will be available online after 13TH APRIL 2017.
Instructions to students:
Students are required to note the following:
1. This is a group assignment, therefore ALL students in the group are expected to make an EQUAL CONTRIBUTION to the assignment.
2. Students are expected to answer ALL parts of the assignment.
3. The report should be produced using MICROSOFT WORD, with the calculations being done in MICROSOFT EXCEL.
4. Students are expected to CORRECTLY CITE any material used in the preparation of the course and include both a FULL LIST OF REFERENCES and LIST OF BIBLIOGRAPHIC MATERIALS used in the preparation of the report at the end of the report. Marks will be deducted for incorrect referencing.
5. Students should ensure that the work follows a CLEAR AND LOGICAL STRUCTURE, and the work should be CAREFULLY PROOFREAD several times to avoid grammatical and spelling mistakes. Marks will be deducted for poor spelling and grammar and if there is a lack of clarity in the report.
6. Should you have an questions regarding the coursework or wish to discuss any issues that you may have with a group member, please do not hesitate to contact the module leader by EMAIL (S.Vandellen@westminster.ac.uk) or drop in to see him during his OFFICE HOURS (Tuesdays 15:30 to 16:30 and Thursdays 14:00 to 15:00).
7. Each group will be expected to submit ONE copy of the report via Turnitin and ONE copy of the Excel file with the calculations using the link on Blackboard.
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8. To avoid unnecessary stress, students are advised to start the coursework AS SOON AS POSSIBLE and to NOT leave submitting it to the last minute due to the fact that online submission links tend to be busy and may not work efficiently around the deadline.
9. Submission of the report or Excel file by email is NOT permitted and any such submissions will NOT be marked.
10. All work should follow the SUGGESTED STRUCTURE outlined BELOW.
Presentation guidelines:
Students are required to note the following:
1. Students should ensure that the work follows a CLEAR AND LOGICAL STRUCTURE, and the work should be CAREFULLY PROOFREAD several times to avoid grammatical and spelling mistakes. Marks will be deducted for poor spelling and grammar and if there is a lack of clarity in the report.
2. The report component of the coursework should be written in Microsoft Word, using the TIMES NEW ROMAN 12 POINT font, with ONE AND A HALF LINE SPACING.
3. All tables, figures and appendices in the report and Excel file should be CLEARLY LABELLED; marks will be deducted if for tables and figures that are not clearly labelled.
4. HEADINGS for sections and subsections should be in BOLD and correctly LABELLED.
5. Any formulae included in the report should be expressed in the correct MATHEMATICAL format and NOT in Excel format.
Suggested structure:
The report should following the following structure:
1. COVER PAGE, which should contain:
a) The module title and code.
b) The title of the report.
c) The names of the group members with the respective student numbers.
2. TABLE OF CONTENTS, which should contain:
a) A full list of sections (including list of references, list of bibliographic materials, and any appendices).
b) The page number on which each section begins.
3. EXECUTIVE SUMMARY, which should:
a) Highlight the key points and findings of the report.
b) Be in the third person and use the present tense, e.g. “This report compares…”
4. INTRODUCTION, which should:
a) Give a succinct explanation of the aims, scope and context of the report.
b) Include brief details and definitions of any information necessary for the reader to understand the report.
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5. MAIN BODY, which:
a) Is the main account of the case or organisation that you are writing about with the main discussion and analysis of any results taking place here.
b) Should be based on a factual analysis of evidence (results), not on your unsupported opinion, e.g. you should avoid writing things like “I feel that…”
c) Ensures that any assertions that are made are backed up with supporting evidence, other from other academic sources or from your results.
d) Includes tables and diagrams of relevant and important results.
6. CONCLUSION, which:
a) Should briefly summarise the aim and key findings of the report.
b) Could make use of bullet points to isolate key points.
7. LIST OF REFERENCES AND BIBLIOGRAPHY, where:
a) The list of references lists the details of any material cited in the report (full details of the source should be given using the Harvard referencing system).
b) The bibliography lists the details of any other sources referred to when preparing the report but not actually cited in the report itself (full details of the source should be given using the Harvard referencing system).
c) Details of the Harvard referencing system can be found at:
http://www.westminster.ac.uk/study/current-students/support-and-facilities/library-it-services/referencing
CASE STUDY:
Cavendish Bank is a UK-based bank and is therefore regulated under the Basel Accords and governed by UK banking regulation. As the Chief Risk Officer (CRO) at Cavendish Bank, you are responsible for setting the bank’s capital reserves at an appropriate level such that these are in line with the requirements of the Basel Accords.
You are aware that Cavendish currently holds the following assets:
1. Cash reserves worth £0.01 million.
2. £6.00 million worth of 2-year bonds issued by Anglo American Plc.
3. A 4-year interest rate swap with Shell Energy North America, (US) L.P., which has a notional principal value of £7.00 million and is currently valued at £2.30 million.
4. A 6-year forward contract with the Chilean government as the counterparty, which has a face value of £25.00 million and is currently valued at £2.40 million.
5. An 18-month forward contract with the Thai government as the counterparty, which has a face value of £1.05 million and is currently valued at £0.21 million.
6. £3.00 million worth of 5-year government bonds issued by Poland.
7. Loans to the Bank of Ireland, which have a maturity of six months and a principal value of £2.50 million.
8. £10.00 million worth of residential mortgages.
9. £50.00 million worth of 2-year UK gilts.
10. A 2-year exchange rate swap with Toyota Motor Corp., which has a notional principal of £4.00 million and is currently valued at £0.80 million,
At a risk meeting yesterday, Cavendish Bank’s Chief Financial Officer (CFO) also informed that the bank had recently invested in £20.00 million EACH in FIVE FTSE100 stocks.
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You are also aware that the bank’s reported annual gross income over the past three years was £12.50 million (2015), £11.80 million (2014), and £11.20 million (2013), respectively.
ASSUMPTIONS:
When setting the capital reserves, you always make the following assumptions:
1. There is no capital charge for the bank’s specific risk and the average VaR (or sVaR) over the last 60 days is less than 1/3 of the bank’s most recently calculated VaR (or sVaR).
2. The stressed VaR is equal to 120% of the VaR.
3. All transactions are in pounds sterling, therefore you will need to use Standard & Poor’s (S&P) foreign short- / long-term credit rating (see point 2 in the tips section).
4. Lambda is set at 0.995 for the extended (i.e. weighting) version of the historical simulation method of estimating the market risk capital charge.
REQUIRED:
Students are required to complete the following:
1. Estimate the MARKET RISK capital charge under the different Basel Accords, where you are required to:
a) Choose FIVE companies which are constituents of the FTSE100 index and collect the respective historical adjusted closing prices for each of these over the past two years (501 trading days).
b) Use BOTH the variance-covariance and historical simulation methods to estimate the market risk capital charge.
c) Use either the basic or extended methods for the historical simulation method of estimating the market risk capital charge.
d) Compare the results from and pros and cons of the chosen variance-covariance and historical simulation methods.
2. Estimate the CREDIT RISK capital charge under the different Basel Accords.
3. Estimate the OPERATIONAL RISK capital charge under the different Basel Accords.
4. Make a recommendation to the CFO as to the amount and types of capital that Cavendish should hold in order to comply with the regulatory requirements.
5. Discuss the development of the Basel Accords framework and explain the incremental impact on the capital requirements of Cavendish Bank.
When addressing the first three points above, students are required to:
1. Discuss the steps involved in each calculation, explaining any formulae provided as well as any assumptions that they have made.
2. Provide details of the data, steps in each method, Excel formulae and values of elements in the formulae for each calculation in the Excel spreadsheet.
3. Compare the results under each different Basel Accord used and provide a commentary on these differences.
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Tips for the coursework:
1. The respective credit ratings of the counterparties in claims can be obtained from the S&P website, which can be found at:
https://www.standardandpoors.com
Registration is required but is free of charge.
2. Definitions of the different types of S&P credit ratings can be found at:
http://people.stern.nyu.edu/igiddy/ABS/sandpratings.htm
3. A list of the OECD countries is available from the OECD website, which can be found at:
www.oecd.org/about/membersandpartners/
Frequently asked questions:
1. “Where can we find data for the historical stock prices?”
This is readily available from databases like Datastream, Yahoo Finance or Bloomberg (FMS Suite). Students should always remember to use the adjusted closing price.
2. “Where can we find a list of the constituent stocks in the FTSE100?”
This is readily available from databases like Datastream, Yahoo Finance or Bloomberg (FMS Suite). This will usually be in the details of the index itself.
3. “How should we structure the main body of the report? Should we have separate sub-sections for each of the Basel Accords, i.e. Basel I (including the 1996 amendment), Basel II (including Basel 2.5) and Basel III? Or should we rather have separate sub-sections for each risk-type, i.e. market risk, credit risk and operational risk?”
This is totally up to you, either of these structures works for us. This being said, past experience tells us that some students found it easier to use the former structure.
4. “Should we consider the change in Basel Accords that occurred within the data period?”
No. To make your life easier, it is safe to assume that only one of the latter Basel Accords dominated within the time-frame examined. In other words, you only need to calculate the required risk capital under Basel I, and the repeat the same process for Basel II and then finally Basel III.
Submission of coursework
Unless explicitly stated otherwise in writing by the module leader, all coursework on this module is submitted via Blackboard only. It will automatically be scanned through a text matching system (designed to check for possible plagiarism). Please note the following:
1. DO NOT attach a CA1 form or any other form of cover sheet.
2. YOU MUST include your names and student IDs on the first page of your assignment.
To submit your assignment, do the following:
1. Log on to Blackboard at http://learning.westminster.ac.uk;
2. Go to the relevant module Blackboard site;
3. Click on the ‘Submit Coursework’ link in the navigation menu on the left-hand side, as advised by the module teaching team;
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4. Click on the link for the relevant assignment;
5. Follow the instructions.
Finance holds
If on the due date you have a finance hold on your student account, you may not be able to access Blackboard to be able to submit electronically. If this is the case, you may be able to submit a paper copy to the Registry. Assignments submitted this way will ONLY be accepted if it is clear that you have a finance hold on the due date. The penalties for late submission will still apply.
You will be given details by the module teaching team about how and when you will receive your marks and feedback on your work.
Remember
It is a requirement that you submit your work in this way. All coursework must be submitted by 1.00 p.m. (13.00) UK time on the due date.
If you submit your coursework late but within 24 hours or one working day of the specified deadline, 10% of the overall marks available for that element of assessment will be deducted, as a penalty for late submission, except for work which is marked in the range 40% – 49%, in which case the mark will be capped at the pass mark (40%).
If you submit your coursework more than 24 hours or more than one working day after the specified deadline you will be given a mark of zero for the work in question.
The University’s mitigating circumstances procedures relating to the non-submission or late submission of coursework apply to all coursework.
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