In an excel spreadsheet create a credit metric model Calculation of the risk of a sovereign loan portfolio.

a$.$ With the CreditMetrics model compute $95\%,99\%$ and $99\mathrm{.}9\%$ relative $($from the mean$)$ VaR and ES for the portfolio of sovereign loans assigned to your group $($see Appendix A$).$ Use a time horizon of $1$ year, $10,000$ Monte Carlo simulations and a $30\%$ asset correlation.

$[$Note: Relative VaR in CreditMetrics is computed as E$($V$)-$V$*$ where E$($V$)$ is the expected value of the $1-$year forward portfolio value and V$*$ is the simulated $1-$year forward portfolio value at the $5\%,1\%$ and $0\mathrm{.}1\%$ percentiles, respectively. Relative expected shortfall is computed as E$($V$)-$V$**$ where V$**$ is the average of the $1-$year forward portfolio values below V$*.]$

b$.$ Explain why you think that your results are plausible.

Portfolios are composed of exposures to Turkey, Argentina, Brazil and Venezuela. To implement CreditMetrics you will need the following information:

i$.$ Zero coupon government yields. You may obtain yields from Bloomberg, Eikon$/$Datastream$,$ or other services. The yields for the relevant maturities in your analysis can be derived by interpolation in case of need. Assume that all yields refer to debt denominated in US dollars. If instruments and data are not available in the market, please make reasonable assumptions and explain your choices.

ii$.$ Country ratings should be sourced via the Moody$$s website. Simply look up a rating from the research tab. You will need to register with Moody$$s to have access to the rating information. Registration is free. iii. Sovereign default rates and recovery rates can be obtained from the document $$Sovereign Default and Recovery Rates, $1983-2022$ which can be downloaded from the Moody$$s website. In case information is not available, you will need to make reasonable assumptions and explain their rationale. $3.$ Stress testing: Compute the $95\%,99\%$ and $99\mathrm{.}9\%$ relative VaR and ES for your portfolio under the following stress scenarios. Consider the effect of each scenario separately and then all combined.

Scenarios:

a$.$ Assume all the sovereigns represented in your portfolio are all downgraded to C$.$ If the sovereigns have already both C rating, you can use a different rating of your choice, and explain your assumption and calculations.

b$.$ Assume that yields increase by $10\%$ across all maturities $($i$.$e$.$ if a current yield is $7\%$ it will go to $17\%).$

c$.$ Assume asset correlation goes to $80\%.$ If the correlation is already $80\%,$ assume that the correlation increases by $10\%.$

d$.$ Explain why you think that your results in all the above points are plausible.