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MTH305 2022/23 Final Exam Revision Scope

Topics/contents  covered  in  the  final  exam  for  2022/23  that  require  thorough understanding. Student can follow the topics below for final revision.

1.  Volatility Modelling: Types of risk, volatility, implied volatility, heavy tail concept,  estimating  volatility  (standard  approach),  EWMA,  GARCH(1,1), maximum likelihood estimations of EWMA and GARCH using Excel. Other contents in this chapter are unlikely to be assessed.

2.   Correlations   and   Copulas:   Covariance   formula,   monitoring   correlation, Gaussian Copula model, Vasicek’s model for a portfolio of loans, estimating PD and p using MLE. Other contents in this chapter are unlikely to be assessed.

3.   Risk Quantification: Value at Risk for normal distribution, expected shortfall for normal distribution, Normal VaR and ES calculations using MATLAB, Euler’s theorem, Aggregating VaRs. Other contents in this chapter are unlikely to be assessed.

4.   Historical Simulation (HS) and EVT: In this topic, HS will not be assessed. MLE for EVT should be reviewed.

5.   Interest Rate Risk: Types of interest rates, duration and convexity for a coupon bearing bond, shift and rotation of a yield curve. PCA MATLAB code.

6.   Interest Rate Models: Short-rate, zero curve, equilibrium models introduced and their MATLAB code, common no-arbitrage models. Procedure for building tree for  Hull-White  model  (detailed  calculations  are  not  assessed.  MATLAB programming is unlikely to be assessed.)

7.   Model-based Risk Analysis: VaR for portfolio, variance of return of a portfolio, related MATLAB programs, handling term structure of interest rates using PCA. Using PCA to calculate VaR. Other contents in this chapter are unlikely to be assessed.

8.   Credit Risk – Estimating Default Probability: All topics in this chapter should be reviewed excluding “comparison between real-world and risk-neutral world probabilities” 1 . Related excel works should be reviewed.

9.   Credit Risk Models and Counterparty Credit Risk: All topics in this chapter should be reviewed excluding “dealer has single uncollateralized long forward with counterparty” . DVA is not as important as CVA.

10. Credit Value at Risk: Rating transition matrix and its Matlab code, Vasicek’s Model for VaR. Other contents such as Credit Risk Plus, CreditMetrics in this chapter are unlikely to be assessed.

11. Operational Risk: Standard Measurement Approach (SMA). AMA is unlikely to be assessed.

12. Liquidity Risk and Stress Testing:  Liquidity trading risk, bid-offer spread, cost of liquidation, unwinding a position optimally, reasons for causing liquidity black holes. Liquidity funding risk and stress testing are unlikely to be assessed.