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# Credit Risk （Master of Qutitative Finance）代寫

25850 Credit Risk

Credit Risk （Master of Qutitative Finance）代寫

Credit Risk （Master of Qutitative Finance）代寫

Assignment

Assignment due on June 6, 2013 as per the Subject Outline. Late assignments

attract a penalty of 4 marks (out of 40) per day.

Students, who submit a draft of their assignments by May 2, 2013, will receive

feedback by May 23, 2013 (and may subsequently amend their draft).

Your assignment must be submitted electronically (Microsoft Excel or Open Office

spreadsheet and a text document — Microsoft Word or PDF) before midnight on

the due date to Erik.Schlogl@uts.edu.au. The text document must be typeset

(using for example L

Credit Risk （Master of Qutitative Finance）代寫

Credit Risk （Master of Qutitative Finance）代寫

A T E X or Microsoft Word).

Handwritten, scanned assign-

ments will not be accepted. Please make sure your spreadsheets are sufficiently

documented so that someone reasonably familiar with the underlying theory is

able to use them — in addition to correctness, this is a criterion by which the

spreadsheets will be marked.

Please follow up if you do not receive an e-mail acknowledging receipt within one

business day.

Please note that not every question necessarily has a single “right” answer. An-

swers to such questions will be assessed as to whether they are well argued, and

the arguments substantiated (for example by mathematical or analytical deriva-

tion, or references to the literature).

Any sources used in the preparation of the assignment must be properly cited.

Please also refer to the “Statement on plagiarism” in the Subject Outline.

1. (10 marks) The Black/Scholes/Merton (BSM) model when applied to credit

risk leads to unrealistic short-term credit spreads.

(a) Why is this the case?

(b) Please construct a spreadsheet workbook where the user can choose

the inputs of the BSM model, and which displays the resulting term

structure of credit spreads.

(c) Please select an extension of the BSM model with more realistic short-

term credit spreads. Please add a spreadsheet to your workbook where

the user can choose the inputs of the model, and which displays the

resulting term structure of credit spreads.

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2. (10 marks) In the multifactor affine model of credit spreads and interest

rates (a “spread–based” model covered in the lectures),

(a) Please construct a spreadsheet workbook where the user can choose

the inputs of a three-factor model, and which then prices a ten-year

CDS with a given fee s (set by the user), paid semi-annually in ad-

vance. You may assume that protection payments occur at the tenor

dates, if default has happened in the prior accrual period.

(b) Consider a defaultable zero coupon bond B(t,T 2 ), where in the case

of default the recovery is cB(t,T 2 ), i.e. some fraction 0 < c < 1 of

the corresponding default–free bond. Please derive the formula for

the price of a European option expiring at time T 1 , T 1 < T 2 , which

gives the right (but not the obligation) to exchange the defaultable

zero coupon bond for k corresponding default–free zero coupon bonds,

k > c. If the issuer of the defaultable bond defaults before expiry of

the option, the option becomes worthless.

Credit Risk （Master of Qutitative Finance）代寫

Credit Risk （Master of Qutitative Finance）代寫

3. (20 marks) In the case Bathurst Regional Council v Local Government

Financial Services Pty Ltd (No 5) [2012] FCA 1200 (5 November 2012)

(see http://www.austlii.edu.au/au/cases/cth/FCA/2012/1200.html — you

may, if you wish, access and reference additional sources on the internet,

provided that you cite them appropriately in your report),

Credit Risk （Master of Qutitative Finance）代寫

Credit Risk （Master of Qutitative Finance）代寫

(a) Please describe (in your own words) the financial product in this case.

What did it promise? What was the investment mechanism by which

it proposed to generate the promised returns?

(b) Please describe the approach used by ABN Amro to model, and by

S&P to rate, the product in question. What inputs did this approach

require? Discuss the modelling assumptions — were they realistic?

Was the approach internally consistent?

(c) What, in your opinion, did the “AAA” rating assigned to the product

mean?

Credit Risk （Master of Qutitative Finance）代寫

Credit Risk （Master of Qutitative Finance）代寫

(d) What ethical quandaries do you think the quantitative analysts in-

volved in this product faced? Can you identify any conflicts of inter-

est? What lessons for quantitative analysts in particular would you

draw from this case?

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