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.
Risk Management & International Finance (BFBL606) Coursework for 2016/17 Page 3 of 6
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:
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.
Risk Management & International Finance (BFBL606) Coursework for 2016/17 Page 4 of 6
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.
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.
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.
Risk Management & International Finance (BFBL606) Coursework for 2016/17 Page 5 of 6
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:
Registration is required but is free of charge.
2. Definitions of the different types of S&P credit ratings can be found at:
3. A list of the OECD countries is available from the OECD website, which can be found at: