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FIN5MRM MARKET RISK MANAGEMENT Suppose that you own, at the end of 31st December 2019, a portfolio worth $25 million AUD consisting of investments in four stocks traded on the US markets

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FIN5MRM MARKET RISK MANAGEMENT

Suppose that you own, at the end of 31^st December 2019, a portfolio worth $25 million AUD consisting of investments in four stocks traded on the US markets. Appendix A provides the details of the portfolio allocation for each student, including stock tickers and the Australian dollar (AUD) value of each holding.

Daily closing prices of stocks can be downloaded from Yahoo Finance.^[1] Historical exchange rates can be obtained from: https://www.macrotrends.net/2551/australian-usdollar-exchange-rate-historical-chart

 

Consider a historical sampling period of three years from 1st January 2017 through 31st December 2019. Each student needs to submit a written risk report for your portfolio and a supplementary Excel workbook to Section 3 - Quizzes & Individual Assignment on LMS^[2] by 18th May, which should include the following parts:

 

Part A1: Briefly describe the background for each firm in your portfolio.

3. marks]

 

Part A2: First, calculate the 95% daily portfolio VaR using the basic methodology of the historical simulation approach. Then, calculate the 95% daily portfolio VaR using the exponential weighting methodology of the historical simulation approach. 

4. marks]

 

Part B1: Calculate the 95% daily VaR for the portfolio using the model-building approach. Generate a VaR report for the portfolio based on the model-building approach, which should contain the following elements:

1. Undiversified VaR
2. Diversified VaR
3. Diversification benefit
4. Marginal VaR
5. Component VaR

[5 marks]

 

Part B2: Use your own words to explain what is the relationship between diversified VaR and undiversified VaR?

1. 2. marks]

 

Part B3: Use your own words to explain what is the relationship between marginal VaR and incremental VaR?

1. 2. marks]

             

 

 

Part B4: Marginal VaR in Part B1 is a useful tool for risk management. Discuss how to change a portfolio position to minimise the portfolio VaR while keeping the portfolio fully invested. Generate a new VaR report based on the risk-minimising positions.

1. 3. marks]

 

Part C1: Use the period 1st January 2020 to 31st March 2021 for VaR backtesting,^[3] and implement backtesting procedure to evaluate the portfolio VaR determined in Part A2 and Part B1, respectively, with unconditional coverage.

1. 3. marks]

 

Part C2: Use the period 1st January 2020 to 31st March 2021 for VaR backtesting, and implement backtesting procedure to evaluate the portfolio VaR determined in Part A2 and Part B1, respectively, with conditional coverage.

[3 marks]

 

your own words

Part C3: Backtesting is usually conducted on a short horizon, such as daily frequency. Use  to explain why.

1. 2. marks]

 

Part D: Contrast and compare your findings in Part C1 and Part C2 and further comment on the performance of the market risk measurement approaches used in Part A2.

1. 3. marks]

 

 

Submission Instructions:

 

1. The submission should include two files: a) your risk report in a Word document and

b) an Excel workbook. Please include all your Excel working in one single Excel file.

 

2. The assignment is expected to be done in a professional manner, which means that grammar, spelling, and overall presentation will have an influence on the score.

 

 

 

Appendix A

Student ID	Surname	Portfolio Info	Stock 1	Stock 2	Stock 3	Stock 4
20143405	Alimilla	Stock Ticker	TFC	CTLT	ETR	GM
		AUD millions	7	7	7	4
20299604	Garg	Stock Ticker	RHI	PENN	LNT	DRE
		AUD millions	8.5	8.5	4	4
20463044	Gupta	Stock Ticker	CFG	PAYX	AFL	HLT
		AUD millions	7	5.5	4	8.5
20619813	Kasaju	Stock Ticker	CZR	AIG	LIN	SHW
		AUD millions	7	5.5	5.5	7
19895318	Bui	Stock Ticker	LEN	MCD	PAYC	GRMN
		AUD millions	8.5	5.5	5.5	5.5
20303659	Jothikumar	Stock Ticker	TMUS	HBAN	NLOK	TTWO
		AUD millions	7	4	10	4
20451265	Pham	Stock Ticker	DXCM	WY	TEL	FDX
		AUD millions	7	5.5	4	8.5
20623269	Doan	Stock Ticker	CDW	LLY	AVB	CL
		AUD millions	5.5	4	7	8.5
17234357	Adu	Stock Ticker	NEE	BKR	VTR	HAL
		AUD millions	5.5	5.5	5.5	8.5
17241788	Rabai	Stock Ticker	CDNS	PRU	GPS	XOM
		AUD millions	5.5	7	4	8.5
20449759	Nala Bothula	Stock Ticker	CF	ALLE	YUM	MCHP
		AUD millions	7	5.5	8.5	4
20451377	Patel	Stock Ticker	AIZ	WELL	BR	HSY
		AUD millions	5.5	7	5.5	7
18948260	Katsaitis	Stock Ticker	CRM	HUM	WHR	UAA
		AUD millions	5.5	5.5	7	7
19852071	Mahadevaiah	Stock Ticker	KIM	MU	FE	WDC
		AUD millions	7	8.5	4	5.5
20107510	Pappula	Stock Ticker	PSA	PNC	MPC	MRK
		AUD millions	7	4	4	10
20339982	Akbar	Stock Ticker	BIO	ANSS	TMO	COO
		AUD millions	8.5	7	5.5	4
20419735	Konkayala	Stock Ticker	ED	AWK	ILMN	INTU
		AUD millions	10	5.5	4	5.5
20449630	Pochinapeddi	Stock Ticker	CAH	MO	APTV	ABBV
		AUD millions	5.5	7	4	8.5
20626799	Pham	Stock Ticker	TPR	LEG	DHI	NSC
		AUD millions	4	7	10	4
18556488	Xiong	Stock Ticker	MSCI	SYY	NOC	CTXS
		AUD millions	8.5	4	4	8.5
20466806	Chen	Stock Ticker	VFC	HOLX	MLM	PYPL
		AUD millions	7	4	7	7
20503648	Purkayastha	Stock Ticker	CPRT	HII	KMB	DISCA
		AUD millions	4	4	8.5	8.5
17809579      Liu       Stock Ticker    APA     DIS      JNJ      FLT

                      AUD millions  4          8.5       7          5.5

20520782	Nguyen	Stock Ticker	EXPD	VLO	RE	EXR
		AUD millions	5.5	7	7	5.5
20306876	Hoang	Stock Ticker	EFX	LKQ	BIIB	ICE
		AUD millions	5.5	5.5	8.5	5.5
20526951	Lieu	Stock Ticker	PTC	BSX	AMGN	MMC
		AUD millions	10	4	7	4
18885237	Zhu	Stock Ticker	SPGI	HBI	NWSA	GILD
		AUD millions	4	8.5	7	5.5
20153651	Damavarapu	Stock Ticker	AKAM	ROK	HWM	ANTM
		AUD millions	7	8.5	5.5	4
20645041	Suhail	Stock Ticker	CCL	DXC	EXPE	TWTR
		AUD millions	5.5	8.5	5.5	5.5
20484879	Krishnamurthy	Stock Ticker	EIX	SO	LUV	CVX
		AUD millions	4	8.5	5.5	7
18055119	Pham	Stock Ticker	STT	TXN	TFX	TER
		AUD millions	8.5	4	7	5.5

This appendix contains portfolio allocation for each individual (the first two columns present students’ IDs and surnames), including stock tickers of the four stocks and their holdings in Australian dollar (AUD).