Market Capital Risk Charge

BT Group PLC

Assignment Outline:

The assignment is an individual report on risk analysis of a specific company. You are required to write a risk report on a specific company for an institutional investor who has £200,000 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 RiskCapital Charge under different Basel Accords 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. (Adj Closing Price, Basel2 and 2.5)

(Marks allocated: 35%, e.g., about 400 words excluding appendices)

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 theworstcase 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 (anonymous marking, do not put your name), should be submitted via the module blackboard site.
2. An Excel spreadsheet (labelled with your Company name), containing stock data and all calculations where necessary should be submitted via the module blackboard site.
3. You must include your student number, module title and report title on the first page (Cover Page) of your report. The report is 1500 words (±10%), 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 data.

You are expected to make full use of all the facilities offered by the University libraries and other sources. Examples of other sources of information include the Financial Times, the Economist, Investors’ Chronicle, Fame database, Bloomberg, DataStream, Excel cards and databases.