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4 pages/β‰ˆ1100 words
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Style:
Harvard
Subject:
Accounting, Finance, SPSS
Type:
Coursework
Language:
English (U.K.)
Document:
MS Word
Date:
Total cost:
$ 22.46
Topic:

Risk Report on FirstGroup PLC for Institutional Investor

Coursework Instructions:

Assignment Outline:
The assignment is a report on risk analysis of FirstGroup PLC. You are required to write a risk report on FirstGroup PLC for an institutional investor who has £120,000 to invest. You are working for the investor so the report should be neutrally worded. This is not a sales report where your aim is to persuade the investor to take a position. Instead, it is an honest evaluation of risk to enable the investor to make the correct decision for themselves. You are not required to provide a recommendation. The aim of the investor is to make a positive return from their capital; therefore, you should attempt to identify risks which will affect the company and might lead to a reduction in share price. You should also, where appropriate, use numerical techniques to quantify the risks of the investment.
Required:
1. You are free to arrange the report in any way you like, however, the first page must contain a title (containing the Company name) and an Executive Summary (no more than 200 words) describing your key findings.
(Marks allocated: 10% - no more than 200 words)
2. Estimate the Market Risk Capital Charge under Basel II and Basel II.5 for the institutional investor if they invested in the company. You are required to use both variance-covariance and historical simulation method to estimate the market risk capital charge (collecting the historical closing price for the company for one to four years). You should also compare the results from and pros and cons of the chosen variance-covariance and historical simulation methods.
(Marks allocated: 35%)
3. There are a range of risks which may affect the company and you should attempt to identify and describe the specific risks. Depending on the firm these may include: market risk, risks to the sector*, foreign exchange rate risk*, credit risk*, operational risk* and others. (* note numerical analysis is not required for these risks due to difficulty of obtaining data)
(Marks allocated: 35%)
4. For the risks analysed above, address if any of these risks may easily be reduced by the institutional investor. Estimate the worst-case scenarios for the investor using quantitative analysis. In particular, if the investment goes badly, how much they are likely to lose. In doing this you should present your calculations and justify your approach.
(Marks allocated: 20%)
Format of Coursework:
1. An electronic copy of your assignment, which is properly labelled with your Company name -FirstGroup PLC.
2. An Excel spreadsheet (labelled with your Company name - FirstGroup PLC), containing stock data and all calculations where necessary should be submitted.
3. The report is 1000 words (±10%) excluding appendices, with size 12 font and 1.5 line spacing for the main text.
4. List of References should be included if any materials were cited in the report, following the Harvard Referencing Style. Appendices may be used where necessary to include relevant definitions or data.
You are expected to make full use of all the sources. Examples of other sources of information include the Financial Times, the Economist, Investors’ Chronicle, Fame database, Bloomberg, DataStream, Excel cards and databases.

Coursework Sample Content Preview:

Risk Report on Firstgroup Plc for Institutional Investor
Name
Course
Instructor
Date
Executive Summary
FirstGroup PLC is a British multi-national transport company, and as part of risk assessment, there is the use of variance-covariance and the historical Simulation method in estimating the market risk capital charge. Evaluating the market risk capital charge is under Basel II and Basel II. For an investor with £120,000, there is an evaluation of the risk of loss at 90 to 99% confidence interval levels. There is also a focus on risks affecting an investor in FirstGroup PLC, risk management strategies, and an investor's worst-case scenarios.
Market Risk Capital Charge under Basel II and Basel II.5
The market risk capital charge depends on the market risks and expected return on investments and the return rate depends on the investors' expectations. The risk of loss after an £120,000 investment is evaluated using two methods. There minimum capital requirements proposals under Basel II and Basel II.5, and based on the market risk capital charge there are adjustments to capital requirements.
Market Risk Capital Charge

CI

99%

99%

 

Variance-covariance

Historical Simulation

Basel I

$44,762.38

$64,421

Basel II.5

$111,905.94

$161,052.50

Table 1: Market Risk Charge
Variance-covariance
* Capital requirement under Basel I,
Market risk capital= max (VaR t−1,mc ×VaRavg)+ SRC
* VaRt−1 : the most recently calculated VaR
* VaRavg : the average VaR over the last 60 days
* SRC : the Specific Risk Charge for idiosyncratic risk related to the company
* The SRC can include the credit risk for corporate bonds held.
At 99%, Z= 2.326
Standard deviation= 0.0507133
VaR (99%) =120,000*2.326* 0.0507133 * √10 = $ 44,762.376
(b)Capital requirement under Basel II.5
Max (VaR t−1, mc VaRavg) + max(sVaRt−1, ms × sVaRavg )
VaR (99%) = [120,000*2.326* 0.0507133 * √10 ] + 1.5[120,000*2.326* 0.0507133 * √10] =
44,762.376 * 2.5 =$ 111,905.94
Historical Simulation
* Capital requirement under Basel I,
Market risk capital= max (VaR t−1, mc ×VaRavg)+ SRC
99% 1-day VaR= 20,371.82
99% 1-day VaR=20,371.82*√10 = 64,421
Market risk capital= 64,421
* Capital requirement under Basel II.5
Max (VaR t−1, mc VaRavg) + max (sVaRt−1, ms × sVaRavg )
VaR (99%) = (20,371.82*√10) * 1.5 (20,371.82*√10) = 161,052.5
Market risk in portfolio of BigYellow, FirstGroup and Sainsbury
* Capital requirement under Basel II, Market risk = max (VaR t−1,mc ×VaRavg)+ SRC
at 99%, Z= 2.326
VaR (99%) =10*2.326*0.020272 *(10)^0.5= 1.4911003 million
* Capital requirement under Basel II.5 max (VaR t−1,mc VaRavg) + max(sVaRt−1, ms × sVaRavg )
VaR (99%) = [10*2.326*0.020272 *(10) ^0.5] + 1.5[10*2.326*0.020272 *(10) ^0.5]= 3.727751 million
The variance-covariance method assumes that the behaviour of the historical series of returns presents a given probability distribution. For simplicity, there is an assumption of normal distribution by t...
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