MBA AF 634 Risk Management

Instructions:
The objective of the project is to provide quantitative assessment of corporate financial risk using C –
VaR (Corporate Value-at-Risk) technique. The technique enables risk manager to obtain precise
quantitative assessment of the impact of various operational and financial risk factors and can help top
executives formulate and execute corporate strategy.
In the course of the project you will be required to collect data, specify inputs and conduct various
analyses to be described below. Prior to starting your assignment read the HBR case study #9-206-046
entitled “Understanding Corporate-Value-at-Risk through a Comprehensive and Simple Example,” by
Marc Bertoneche and Franz Maurer. The case study outlines the approach taken by C-VaR to measure
corporate financial risk exposures and is available on HBR class page. I have also posted the C-VaR
Excel template to Blackboard based on this case study.
You may work individually or form a group consisting of no more than 3 students. By Wednesday,
March 30, email to me the names of your group members. You should submit your answers to the
questions listed below along with your Excel models by Wednesday, May 11.
Assignment:
1. Collect additional quarterly data on EUR/USD exchange rate, aluminum price per ton and 3-
month interbank rate. Suggested data sources are listed below, but you can use other data sources
such as Bloomberg if you prefer. Your quarterly data should start on 3/31/1999 and end on
12/31/2020. (10 pts)
2. Specify inputs. You can use the inputs of the case study/excel template or you can make your
own assumptions. If you choose to specify your own inputs, two restrictions apply: (1) values of
translated revenue from European sales, aluminum purchases, net transaction gains/losses on
Euro account receivables and interest expenses must depend on bootstrapped growth rates, and
(2) average pre-tax earnings must be positive. (5 pts)
3. Using C-VaR Excel template as your guide and assumptions you have made in part 2, calculate
95% C-VaR for this firm as of 12/31/2020 (your analysis date). Use 2,000 scenarios to forecast
pre-tax earnings for year ending 12/31/2021. Assume that the benchmark is the average pre-tax
earnings of the 2,000 scenarios. (15 pts)
a. Create histogram showing the distribution of pre-tax earnings across all scenarios. (5 pts)
b. How large the 95% C-VaR relative to your benchmark? Should this result concern
corporate risk managers? (5 pts)
4. Let’s suppose that quarterly historical growth rates in all three risk factors were increased by 30%
in absolute value. For example, if a growth rate was 40% in a given quarter it now becomes 52%
or if a growth rate was -50% in a given quarter it now becomes -65%. Given this assumption recalculate C-VaR. Use 2,000 scenarios to forecast pre-tax earnings for year ending 12/31/2021.
Assume that the benchmark is the average pre-tax earnings of the 2,000 scenarios and assume
95% C-VaR. Hint: Think carefully how you should adjust bootstrap to answer this question. (15
pts)
3
5. Assume that corporation decides to lock-in the exchange rate prevailing on 12/31/2020 through
hedging, but not other risk factors. What is the C-VaR in this case? Use 2,000 scenarios to
forecast pre-tax earnings for year ending 12/31/2021. Assume that the benchmark is the average
pre-tax earnings of the 2,000 scenarios and assume 95% C-VaR. (15 pts)
6. Now let’s assume that corporation locks-in the aluminum price prevailing on 12/31/2020 through
hedging, but not other risk factors. What is the C-VaR now? Use 2,000 scenarios to forecast pretax earnings for year ending 12/31/2021. Assume that the benchmark is the average pre-tax
earnings of the 2,000 scenarios and assume 95% C-VaR (15 pts)
7. Compare results in parts 3 through 6. What can you conclude about corporation’s different
hedging strategies? What hedging strategy would you recommend? Discuss. (15 pts).
Extra credit
8. Re-run part 3 with 10,000 scenarios instead of 2,000 scenarios. Would your results and
conclusions change significantly relative to part 3? Discuss briefly. (5 pts)
Suggested data sources:
http://pubdocs.worldbank.org/en/561011486076393416/CMO-Historical-Data-Monthly.xlsx
https://fred.stlouisfed.org/series/IR3TIB01USM156N
http://research.stlouisfed.org/fred2/series/DEXUSEU/

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