Abstract
When a bank trades financial instruments, what it faced is mainly interest rate risks. But it also cannot ignore the potential loss caused by debtors’ credit downgrades. How to accurately measure and manage both types of risks is an important task for all banks. In this thesis, we examine how to derive the default intensity and corresponding probability of default in the credit default swap (CDS), and then combine it with the risk-free rate. We then use Dynamic Nelson-Siegel model to estimate this combined structure. In the last stage, we use Monte Carlo method to simulate ten day Value at Risk as a measure for Banks' risk-based capital requirement.