Market Value-at-Risk Report for US Treasury Securities and Portfolio

We're thrilled to introduce our latest fixed-income risk measurement project, the "Market Value-at-Risk Report for US Treasury Securities and Portfolio" – A unique opportunity for participants to deepen their understanding of risk calculations on fixed-income securities, the impact of change in market risk factors on portfolio risk, and insightful market risk commentaries.

our project aims to provide participants with a comprehensive understanding of the value-at-risk (VaR) estimation for a fixed-income portfolio, covering securities ranging from treasury bills, t-notes, t-bonds, to inflation-protected securities. Additionally, participants will explore interest rate curves associated with these securities. It also aims to equip participants with the necessary knowledge and skills to analyze how various risk factors influence the portfolio's risk, ultimately influencing market risk capital charge.

Prerequisites

participants are expected to have a fundamental understanding of fixed-income securities and be comfortable with concepts such as interest rate curve construction, instrument features, and pricing and valuation of various fixed-income securities.

Module 1: Interest Rates | Monitoring Yield Spreads | Modeling Term-Structure of Interest Rates

• Financial Books: Understanding Treasury Securities – Insights from 1-Month T-Bill to 30-Year T-Bond

• Lectures:

  • Historical Time Series Data And Interest Rate Shocks

  • Yield Curve Construction – Interpolation Methods

Module 2: Pricing And Valuation of Fixed-Income Securities

• Financial Books: Understanding Fixed-Income Treasury Securities

• Lectures:

  • Full Valuation DCF Model – US Treasury Bills

  • Interest Rate Movement And Mark-to-Market PnL

  • Full Valuation DCF Model – US Treasury Notes/Bonds

  • Full Valuation DCF Model – US Treasury Notes/Bonds – Mark-to-Market

Module 3: Fixed-Income Portfolio Risk Measurement And Management

• Lectures:

  • Introduction to Value-at-Risk (VaR) Measure

  • Historical Simulation VaR – Interest Rate Bonds

Fixed-Income Portfolio

participants are expected to estimate value-at-risk of a portfolio containing fixed-income securities, employing a comprehensive analysis.

these securities fall under the asset class of fixed income, with interest rates being the primary risk factor(s). these securities are issued by the US Government through the US Treasury Dept., each security is denominated in USD with a face value of $100.00.

Financial Instruments (Products): Treasury Bills, Notes, Bonds, and Treasury Inflation-Protected Securities

Instruments' Type: Zero-Coupon, Coupon-Bearing

Instruments' Asset Class: Fixed Income

Risk Asset Class: Interest Rates

Issuer Entity: US Government

Issuer Authority: US Treasury

Denominated: USD

Face Value: $100.00

Valuation Date: 28th March 2024 (end of quarter 1, 2024)

Coupon Frequency: Semi-Annual (if applicable)

Pricing/Valuation Model: Discounting Cash Flow (DCF)

Yield Curve Construction Model: Linear Interpolation

Day-Count Convention: Actual/360 for T-Bills, 30/360 for T-Notes/Bonds/TIPS

Risk Metric: 1-Day VaR

Risk Calculation Methodology: Historical Simulation

Confidence Level: 99%

Market Data: UST Rates

Shock Type: Absolute

Lookback Period: 252 Trading Days

Portfolio of Fixed-Income Securities

Total Securities: 6, Notional Amount Invested: +$30.0mn

UST3M CUSIP: 912796Y45, Notional: +$1.2mn | UST26W CUSIP: 912797KK2, Notional: +$2.8mn | UST2Y CUSIP: 91282CKB6, Notional: +$1.0mn | UST5Y CUSIP: 91282CKD2, Notional: +$4.2mn | UST10Y CUSIP: 91282CJZ5, Notional: +$8.0mn | UST30Y CUSIP: 912810TX6, Notional: +$12.8mn

Fixed-Income Portfolio of US Treasury Securities

.zip

Download ZIP • 5.38MB

(please note, if the bond has a face value of $100 and the notional amount is $1.0 million, then the total number of bonds issued would be $1,000,000 / $100 = 10,000 bonds)

Market Data Source for Fixed-Income Securities

Daily Treasury Bill Rates: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_bill_rates&field_tdr_date_value=2024

Daily Treasury Par Yield Curve Rates: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024

Project Requirements

participants are expected to use the historical simulation VaR method for risk estimation and the DCF model for the revaluation of US T-Bills, T-Notes, T-Bonds, and TIPS.

Source market data is a foundational step in risk estimation of fixed-income securities. You have to study the specifics of each of the security and begin sourcing market data and pertaining information.

this data will support the valuation and risk assessment processes.

• Identify reliable data sources and examine relevant market data, including interest rate curves, trends, and economic indicators, to inform risk decisions.
  

• Identify the risk factors associated with each security, and construct interest rate curves either using the linear or spline (for smoother curve fitting and reduce estimation errors) interpolation technique to derive missing interest rates for scenario revaluation.

Documentation: Ensure all data sources are well-documented, including timestamps, source credibility, and data accuracy.

• Use the Discounting Cash Flow (DCF) model to revalue each security based on current market data and interest rate curves. Perform revaluation for each security, considering both the present value of cash flows and changes in interest rates.

  
  

• Determine the profit or loss for each security by comparing the revalued price to the purchase price. Aggregate individual PnL to obtain the total profit or loss for the entire portfolio.

Note: One may perform tenor bucketing of aggregated profit and loss into short-term, medium-term, and long-dated maturity buckets using the variance matching approach. (Optional)

• Determine the VaR by analyzing the distribution of profit and loss outcomes. Typically, VaR in market risk for traded portfolios is calculated at a 99% confidence level, representing the maximum expected loss over a specified period. Report the portfolio VaR as the value corresponding to the chosen percentile in the portfolio profit and loss distribution.

  
  

• Incorporate foreign exchange (FX) cash balances into the Market Value-at-Risk (VaR) analysis for a US Treasury portfolio to account for FX risk exposure. Incorporate FX rate scenarios into the historical simulation to assess the impact of FX rate fluctuations on portfolio VaR. Detail how FX cash balances are integrated into the overall VaR calculation. (Optional)

  
  

• Address and quantify the impact of valuation model errors (model price ≠ market price) on the VaR estimates to ensure the reliability and accuracy of the risk measurement process. (Optional)

Note: Review and document the assumptions underlying the VaR model, including any approximations or simplifications, their potential impact on the VaR calculations, and the steps taken to address them.

Documenting the findings into a comprehensive market risk report, detailing the steps undertaken, including the risk methodology applied, the resulting output, and a thorough analysis of their implications on portfolio risk, are critical responsibilities of any market risk analyst.

Each section of the risk report necessitates thorough research and precise calculations, ensuring that the analysis is based on reliable data and applied financial methodologies. This comprehensive approach ensures that all relevant factors are considered in your Market Value-at-Risk analysis.

Live Presentation

Presenting the report to mentors and other participants during the sessions enhances presentation and content delivery abilities, fostering valuable feedback and discussions. this experience can provide a platform to showcase analytical capabilities and practice articulation of complex financial concepts, directly benefiting job interviews and other professional settings.

Hint: Security Selection | Factors Affecting Securities's Price | Yield Curve Construction | Interpolation Methods | Pricing And Revaluation | Market Fluctuations | Profit And Loss Aggregation | Historical Simulation | Variance Matching Approach | Recommendations

Team Collaboration

participants have the flexibility to choose their mode of operation.

Standalone Mode: If you feel confident and would like to take on the challenge individually, you're welcome to work on the project as a standalone participant. this will allow you to showcase your strengths and decision-making skills.

Team Collaboration: Alternatively, if you believe that collaboration will enhance the quality and depth of your analysis, you are encouraged to form a team. Collaborative efforts often bring diverse perspectives, leading to richer insights and more comprehensive results.

• Self-Selection: Candidates are free to select their teammates. If you already have someone in mind, align with them, and inform the project coordinator of your team composition.
  

• Teammates: While there's no strict limit, we recommend teams of 2-3 members for effective collaboration and equitable distribution of work.
  

• Commitment: Ensure that all members of the team are equally committed to the project.

Please note: Whether you choose to work individually or in a team, the assessment criteria will remain consistent. the emphasis will be on the depth of analysis, quality of insights, and presentation of findings.