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Market and Credit Risk Analysis (764N1)

15 credits, Level 7 (Masters)

Spring teaching

You assess market risk and credit risk and study the foundations of market risk analysis and the basic Value at Risk (VaR) models.

This includes:

• the mapping of portfolios to risk factors
• the construction of covariance matrices and their application to the market risk of portfolios. VaR and ETL is computed at the portfolio level using historical and Monte Carlo simulation and, where possible, analytic solutions and the results are compared and backtested.

Your study of credit risk covers:

• credit scoring models
• counterparty credit risk (especially credit exposure, default, and recovery processes) and credit spreads
• portfolio models of credit risk
• credit valuation adjustments (CVA).

Lecture topics include:

• Introduction to market risk - banking regulations for capital adequacy (Basel Accords) Value-at-Risk (VaR) and Expected Tail Loss (ETL) and their advantages and limitations as measures of market risk.
• Market VaR and ETL at the portfolio level - normal linear model, historical and Monte Carlo simulation models.
• Cash flow mappings for securities and options - equity betas, portfolio betas, cash flow mappings that are, PV, duration and VaR invariant.
• Decomposition of portfolio market VaR and ETL - total, systematic and specific VaR and ETL, equity, interest rate and FX VaR, marginal and component VaR.
• VaR and ETL for options - delta-gamma and delta-gamma-vega mapping of options portfolios and application to VaR and ETL.
• Backtesting models and stress testing portfolios - conditional and unconditional coverage tests; stressed VaR computation.
• Introduction to credit risk - credit ratings, credit spread curves, transition matrices and default and migration risks; Banking regulations for capital adequacy (Basel Accords)
• Mitigation of counterparty credit risk - netting, collateral and central counterparties.
• Modelling credit exposures - Exposure, recovery rates and default processes, methods for quantifying credit exposure.
• Credit value adjustments (CVA) - definition, impact of exposure, default and recovery rates, application to pricing credit risky trades, debt value and funding value adjustments, wrong-way risk.
• CVA hedging - components of CVA hedges; exposure and credit hedges; impact of debt value adjustments and collateral.

 

Contact hours and workload

This module is approximately 150 hours of work. This breaks down into about 32 hours of contact time and about 118 hours of independent study. The University may make minor variations to the contact hours for operational reasons, including timetabling requirements.

We regularly review our modules to incorporate student feedback, staff expertise, as well as the latest research and teaching methodology. We’re planning to run these modules in the academic year 2025/26. However, there may be changes to these modules in response to feedback, staff availability, student demand or updates to our curriculum.

We’ll make sure to let you know of any material changes to modules at the earliest opportunity.