Word Count : 2000 words

Assessment Information

  • This assignment is designed to assess learning outcomes 1-4.
  • This assignment is an individual assignment.
  • This assignment requires you to answer question 1 and 2.

1. Choose one of the below topics and using relevant references, explain the arguments in no more than 700 words. [30 Marks]

  • Credit Default Swaps CDS are valuable financial tools that for tackling credit risk. However, at the same time these innovative contracts have likewise created the prospect for market participants to destabilise the whole economic system. Explain CDS in detail and discuss whether the CDS should be used as a tool for mitigating the credit risk or not.
  • Explain the differences between Basel I, Basel II and Basel III and discuss that how the implementation of Basel III can affect Small and Medium Sized Enterprises (SMEs) access to finance. You need to use relevant references to support your arguments.
  • Assess the role of securitisation in managing the asset side of bank’s balance sheet and discuss why it is argued that the process of seuritisation was a major cause of the global financial crisis.

2. Use the data uploaded in Moodle to predict UK SMEs default events by implementing the relevant accounting-based model. The data collection process, method analysis and results should be discussed in no more than 1300 words. The required tasks are as follows:

  • Use the information in the Altman and Sabato, (2007) study and predict SMEs default by using 5 main accounting indicators used in the logistic model. You need to build the accounting-based model by using the data from 2000 to 2007. You need to use at least 5 years of data for building the model. [30 Marks]
  • Estimate the type 1 and type 2 errors by testing your model in the hold-out sample and estimate the prediction accuracy of the model. The hold-out sample should be selected from 2008 financial data. You need to select any random active and inactive firm from 2008 to make the default rate of the hold-out sample equal to 10%. For example, for the hold-out sample of 100 firms, select 10 inactive and 90 active firms. [20 Marks]
  • Using the Basel IRB method, calculate the capital requirement of the SMEs portfolio. You can put all the firms in the corporate category and use similar rating classes as used in Altman and Sabato, (2007). (Table 12 5-25 million euro) [20 Marks]

Criteria for Assessment

The theoretical work will be assessed based on how the questions are addressed and how they are referenced using appropriate research articles. Regarding the practical component, there are not right or wrong answers for the estimations. However, the process should be explained clearly and supported by using appropriate research articles. This assignment is an individual assignment and the total mark will be 100.