EFN344: Risk Management and Derivatives
Semester 1, 2024
Individual Assignment
The Assignment is due by 11:59PM May 24, 2024
Total Points: 40 (30 for Part A and 10 for Part B)
Assignment Instructions
Please submit your assignment through the “Assignments” section on the EFB344 Risk
Management and Derivatives Canvas site. You need to submit two files separately (there are
two submission links, one for Part A and one for Part B):
1) An Excel Worksheet that includes Part A
Please name the file as follows: YourLastName_YourFirstName_Part_A.xlsx
2) A Word file for Part B.
Please name the file as follows: YourLastName_YourFirstName_Part_B.docx
The documents should be formatted to an appropriate standard.
The assignment will be marked online and results released on Canvas.
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Part A – Risk Management (30 points)
You are required to estimate the risk for a hypothetical holding of 1,000 shares of NAB. This
task is to be completed in Microsoft Excel. You are required to use the template
Template_data_and_analysis_Part_A.xlsx provided in Canvas. (you have to rename the file
before submitting it).
1. Data download
Download the price data of NAB shares for the period from January 31, 2019 to
January 31, 2024. The price data should be daily. You can find the price data from
various sources such as Yahoo finance (https://au.finance.yahoo.com). In Yahoo
finance the share code is NAB.AX and you need to select the “Historical Data” tab.
You are required to copy the data in the Excel tab NAB.ax.
2. VaR calculations
Estimate the market risk for your stock holding held on February 1, 2024 (you are
working out the risk position assuming that you own these shares at the open of
trading that day). You will do this by estimating the Value-at-Risk for the stock using
historical data.
You are required to calculate the 10-day VaR for the portfolio of shares at a
confidence level of 99%.
This risk estimate applies to the next 10 trading days from February 1, 2024 until
February 14, 2024 (i.e. – it should be a forecast of risk).
Based on what you have learnt from EFB344, you have several options for how to
compute this risk measure:
a) the normal distribution using a 252-day rolling window,
b) the normal distribution using a 66 -day rolling window,
c) the normal distribution using the EWMA (lambda = 0.94),
d) historical simulation based on a window of 252 days,
e) historical simulation based on a window of 66 days.
To aid in the decision of which to use, you are going to consider the recent historical
performance of the five models in calculating 1-day VaR at the confidence level of
99%. You will do so by first examining the frequency of instances when the VaR was
exceeded by the observed return using the five years of data.
You will then evaluate the appropriateness of these frequencies over time relative to
the Basel traffic light levels discussed in the lectures. Based on this performance, and
any other factor you think is appropriate, select the best model and report the required
VaR(10, 99%) for February 1, 2024.
Additional instructions:
- You can use arithmetic as well as log returns (the results will be very similar).
- You can assume that the mean returns are zero as discussed in the lectures.
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- You should initialise your EWMA using the sample variance/covariance of the
first 252 daily returns.
- While you have around five years of data, you will only be able to produce
around four years of VaR estimates.
3. Presenting your results
- You are to conduct your analysis in a copy of the Excel file
“Template_data_and_analysis_Part_A.xlsx” provided on the Canvas page (you have
to rename the file before submitting it). This file contains a tab where you have to
copy the raw historical share prices as well as a front page for you to summarize your
results. All working is to be contained in the subsequent tabs.
- The front tab asks you to provide the following:
- Your name and Student number
- The exceedance probabilities for the five models above.
- A graph summarizing the Basel Traffic Light results (such as the one shown in
lecture 3).
- Which of the models above is your preferred model based on the backtesting
results.
- The final VaR(10,99%) for the stock based on your preferred model.
- An evaluation of the relative performance of the five models and a clear
justification of which model is superior based on your backtesting. This is
essentially a discussion of how you should interpret the backtesting results in
order to select the most appropriate model. This should be no more than 300
words.
- Your excel file should be formatted in a reasonably clear way, so that someone who
was given the same job after you would be able to understand your working and
replicate what you have done.
Additional Notes and Instructions:
- After downloading the raw data from Yahoo finance or another financial database,
you will need to make it suitable for analysis.
- Your excel spreadsheet must contain the formulas that you have used for all
calculations (i.e. – don’t paste the values for the calculations).
- There is an Excel file available on Canvas (called “Excel guide.xlsx”) that includes
instructions for how to do several useful things in excel. It also includes some
informative examples which might be of interest. Please look at this file.
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Part B – Reflective Piece (10 points)
Word limit: 500
This task is to be completed in Microsoft Word.
Write a reflective piece on your approach to learning. Note that the emphasis of the reflective
piece is on you as a learner, not the unit or its content, per se.
Part 1: Reflecting on Your Approach to Learning
Reflect on yourself and how you approach learning across different areas of your life—e.g.,
preparing for exams, taking a driving test, how to master a new game or new technology, etc.
Some of the following prompts may help you to think about your approach to learning, but
feel free to raise other aspects in your write-up; this list is not exhaustive.
• I prefer to work by myself on activities that …
• I like working with others when …
• If I can, I try to avoid activities that …
• I find it easiest to understand something when …
• When I don't understand something, I …
• One of the things I do best is …
• I approach learning new and complex ideas by ...
• I deal with ambiguity by ...
• The learning situations in which I feel most confident are ...
• Successful learners are people who ...
Note: In writing this part, you need to ensure that the focus is on you and your own
particular approach to learning. As well, to adequately describe your approach to learning,
you will need to support your description with relevant examples from your own experience.
Part 2: Reflecting on Your Learning in EFB344
Drawing on your insights from Part 1 and your experiences as a student, reflect on your
approach to learning in EFB344 Risk Management and Derivatives by responding to each of
the following questions:
• What was one thing you did that really helped you to learn effectively in this unit?
How do you know this one thing really made a difference to your learning?
• What was one thing you wished you did to help you to learn more effectively in this
unit? Why have you selected this and what have you based your views on?
• Given these reflections on your learning, how do you think they may affect your
approach to future studies?
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Some Guidance on the Reflection Task
The process begins with reflecting on your approach to learning new things (Part 1). As
provided in the assignment instructions, some questions to ask yourself that might help you to
describe your approach to learning in general are as follows:
• I prefer to work by myself on activities that …
• I like working with others when …
• If I can, I try to avoid activities that …
• I find it easiest to understand something when …
• When I don't understand something, I …
• One of the things I do best is …
• I approach learning new and complex ideas by ...
• I deal with ambiguity by ...
Once you have described your approach to learning, the next step (Part 2) is to reflect on your
approach to learning specifically in the context of EFB344 in order to identify one thing that
helped you to learn more effectively in the unit and one thing that you wished you did to help
you to learn more effectively in the unit.
Note: it is important to move beyond pure description in this stage—you need to ask yourself
what about your learning approach was effective and what could be improved, and,
importantly, why this might be so. Some questions that might help you to do this are listed
below:
 How successful was my approach to learning in this unit, and what does this tell me
about me/my approach/my attitudes/my expectations?
 What did I base my actions on? Why?
 What other knowledge can I use to better understand or learn from my experience?
What does it tell me?
 What could/should I have done differently? Why?
 What is my new understanding of the situation and how have I reached it?
Finally, the last question in Part 2 asks you to discuss how this reflection on your learning—
in general and in the context of EFB344, specifically—might affect your approach to learning
in your future studies. In other words, what has this process of reflection made clearer for you
or helped you to realise about yourself and your approach to learning, and how can you use
this information to your advantage in the future? Some useful prompting questions to help get
you started are listed here:
 What broader issues arise from this reflection and what can I learn from them?
 What can I take away from this reflection that I can apply to my future studies and/or
approach to learning?
 What has this experience told me about my strengths/weaknesses, and how can I build
on/improve on them in the future?
 What do I need to do in order to make things better/improve/consolidate/demonstrate
I have learned from this experience?