How to analyse a portfolio of loans

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.
  1. Credit Risk

Analyse a portfolio of loans consisting of 3 companies of your choice with characteristics shown in table below. For example, if you choose company 1 to be Tesla, it will have a maturity of 5 years, repayment value of 12 million and annual interest rate of 6%. All computations must be carried out according to such characteristics.

portfolio of loans consisting of 3 companies

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

Assume that all three loans are senior unsecured debt denominated in US dollars and that the analysis is conducted on 30th November 2021. The loan will be repaid at maturity date. Clearly state any assumptions you make in your estimations.

Using CreditMetrics (full implementation) and KMV, you are required to compute relative VaR and Expected Shortfall with MonteCarlo simulation for the portfolio above at time horizons of 1-year and 2-year periods and confidence interval of 99%.

Interpret, compare, and discuss your results critically. Do a reality check on all the above calculations. Are your results according to your expectations? Why or why not?

(1,500 words, 50 Marks)

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, foreign exchange 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 the 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]