CreditMetrics Fixed Income Portfolio
Budget: $2 – $8 USD
1. Calculation of the risk of a sovereign loan portfolio.
With the CreditMetrics model compute 99% relative (from the mean) VaR and ES for the portfolio of sovereign loans assigned (Venezuela; Turkey). Use a time horizon of 1 year, 10,000 Monte Carlo simulations and a 30% asset correlation.
2. Stress testing: Compute the 99% relative VaR and ES for your portfolio under the following stress scenarios. Consider the effect of each scenario separately and then all combined.
Scenarios:
a. Assume all the sovereigns represented in your portfolio are downgraded to Caa-C (unless they already have that rating in which case you can decide whether to use Caa-C or a lower rating and explain your choice).
b. Assume that yields increase by 12% across all maturities (i.e. if a current yield is 7% it will go to 23%).
c. Assume asset correlation goes to 75%.
d. Explain why you think that your results in all the above points are plausible.
With the CreditMetrics model compute 99% relative (from the mean) VaR and ES for the portfolio of sovereign loans assigned (Venezuela; Turkey). Use a time horizon of 1 year, 10,000 Monte Carlo simulations and a 30% asset correlation.
2. Stress testing: Compute the 99% relative VaR and ES for your portfolio under the following stress scenarios. Consider the effect of each scenario separately and then all combined.
Scenarios:
a. Assume all the sovereigns represented in your portfolio are downgraded to Caa-C (unless they already have that rating in which case you can decide whether to use Caa-C or a lower rating and explain your choice).
b. Assume that yields increase by 12% across all maturities (i.e. if a current yield is 7% it will go to 23%).
c. Assume asset correlation goes to 75%.
d. Explain why you think that your results in all the above points are plausible.