GSBS6144 Financial Institutions Management

TASK 1: Market risk

You are an investment analyst in the chosen financial institution. The financial institution has the following investments as of 31 August 2018:

• Equity investment of AUD 500 million (This investment mirrors the return of ASX All Ordinaries Index)
• Investment in 5-year Commonwealth government securities (CGS) of AUD 200 million
• Investment in the Certificate of Deposit issued by Deutsche Bank in Frankfurt of EUR 120 million

Required

a. Calculate the 10-day equity VaR of the financial institution as of 31 August 2018 using the variance-covariance method at 1% significance.
b. Calculate the 10-day fixed income VaR of the financial institution as of 31 August 2018 using the variance-covariance method at 1% significance.
c. Calculate the 10-day foreign exchange VaR of the financial institution as of 31 August 2018 using the variance-covariance method at 1% significance.d. Calculate the 10-day portfolio VaR of the financial institution as of 31 August 2018 using the variance-covariance method at 1% significance. The portfolio VaR should be computed using equity, fixed income, and foreign exchange positions of the financial institution.

1. GSBS6144 Week 4 Lecture Notes/Handout/ activities

2. Chapter 9, Lange, H.P., et al. (2015). Financial Institutions Management: A risk management approach (4e) North Ryde: McGraw-Hill.

TASK 2: Research Report

You are a research analyst in the chosen financial institution. You need to write a research report on the sensitivity of the stock return of the chosen financial institution to the change in three factors:

1. Market risk
2. Interest rate risk
3. Exchange rate risk;

using the three-factor model proposed by Choi, Elyasiani and Kopecky (1992). The following model can be used to estimate the empirical returns of bank stocks. ????????,???? = ????0 + ????1????????,???? + ????2????????? + ????3????????? + ????????,????

(1) Where ????????,????

is stock return on the ith financial institution; ????????,???? is return on the S&P/ASX All ordinaries Index; ????? represents change in 10-year Commonwealth government securities yield; ????? represents change in the AUD/USD spot exchange rate; and ????????,???? is the random error term at month t.