Case Study Of Hypothetical CDS

Great Essays
Show More
Hypothetical CDS. According to theory highlighted above, usage of derivatives theoretically should reduce bid-ask spread in NPL portfolio market. In order to examine this theory, hypothetical CDS was priced using real-world data for both CO date and most recent 2017 date. CDS form is selected following Italian securitization law where CDS was used as the guarantee. However, a single-name derivative is priced (versus basket CDS applied in Italian securitization law). As an underlying asset of hypothetical CDS Target portfolio is selected. The price of CDS is then compared with a real CDS market data.
As the creation of hypothetical CDS is a very complex process, the standard model (Hull & White, 2000) used as the basis with applying slightly different assumptions …show more content…
The probability of default taken from historical S&P Global rating data (Appendix F) matching BBB rating (matching target portfolio rating of BBB Fitch with S&P rating scale; see Appendix F): period 1- 0.18%, 2- 0.51% and etc. The probability of survival calculated: 1- the probability of default (Banks et al., 2007, p. 171) to every period; period 1: 1 – 0.18%, period 2: 1-0.51%. Fixed payment set semiannual (in aligning with coupon used) diving spread by 2. The expected value of the premium is calculated multiplying survival probability by fixed payment. Following, Present value of premium calculated: Discount factor * Expected value of premium * Open principal (period 1: 0.995* 122. 74*10.7M). Sum of PV of premium =1.184.875€. In addition, PV of accrued interest discounted by the same approach as PV of premium: Accrued interest amount * Discount factor* Open Principal (period 1: 0,995* 0, 11*10.7M). The accrued interest amount is assumed to be half of the fixed payment amount, holding that credit event will occur in the middle of the period (see the formula in page 28): period 1: 122.74/2*0.18. The total amount of Premium leg is defined as a sum of PV of premium and PV of accrued

Related Documents

  • Decent Essays

    Unit 206: Insurance Injury
    • 112 Words
    • 1 Pages

    Unit 206: Insurance Injury

    CIT 206 – INSURANCE INQUIRY CIT 206 is opened when an insurance inquiry or complaint is received from the borrower or authorized 3rd party. The borrower will send RCS proof of insurance coverage along with correspondence disputing the lender placed insurance or the homeowner’s insurance premiums on the loan. The customer is placed in a letter cycle when the current insurance coverage has expired or cancelled. RCS send three letters advising the customer that we need evidence of insurance.…

    • 112 Words
    • 1 Pages
    Decent Essays
    Read More
  • Improved Essays

    Asx300 Week 2 Agression Analysis Paper
    • 1476 Words
    • 6 Pages

    Asx300 Week 2 Agression Analysis Paper

    OPTIMAL RISKY PORTFOLIO: CAPITAL ALLOCATION BETWEEN RISK-FREE AND RISKY ASSETS The optimal capital allocation is the goal of each investor. One way to form an optimal portfolio and maximise the investor’s utility is by maximising the Sharp ratio. This report uses monthly return data of the 10 major sectors in the ASX300 from January 2004 until December 2015.…

    • 1476 Words
    • 6 Pages
    Improved Essays
    Read More
  • Decent Essays

    CDA Portfolio Assignment
    • 306 Words
    • 2 Pages

    CDA Portfolio Assignment

    Portfolio Assignment- Activity Plan I assuming in this activity I am one of the teachers and my goal would be to encourage exploration and discovery through play, in a safe environment. I would always start with rules. Preschool: with an apron only, small half way filled water play container outside with colorful pit toy balls mixed in with toy dinosaurs, using their hands. Small group adult supervision required, find only the dinosaurs.…

    • 306 Words
    • 2 Pages
    Decent Essays
    Read More
  • Great Essays

    Npv Profile Case Study
    • 1316 Words
    • 6 Pages

    Npv Profile Case Study

    This concept builds on NPV by involving discounted payback method, discounted payback index, and marginal growth rate. The factors that are captured in this model are the long-term benefit to shareholders, time spent on the project, and the associated risk. When investing in a project its is important to know when the organization will realize its gain/profit and how long it will take to do so. Knowing these variables will give clues to weather the investment is the right decision to make. The longer the project the greater the risk.…

    • 1316 Words
    • 6 Pages
    Great Essays
    Read More
  • Improved Essays

    Case Study Graincorp
    • 1472 Words
    • 6 Pages

    Case Study Graincorp

    Valuation Methodology In order to value Graincorp’s stock, this report used two-stage discounted cash flow (DCF) model. This model is chosen considering that Graincorp is in the mature stage, with the characteristics of paying high dividends and has a high leverage. Moreover, management stated that they are building another silos by this year, so it is assumed that Graincorp will have an increasing growth for several periods and will drop to the stable growth afterwards. Hence, the first stage of this model would be the increasing phase for 5 years and then followed by the stable growth phase.…

    • 1472 Words
    • 6 Pages
    Improved Essays
    Read More
  • Improved Essays

    Essay On Cheap Quotes Car Insurance
    • 580 Words
    • 3 Pages

    Essay On Cheap Quotes Car Insurance

    Online Cheap quotes car insurance for bad Credit Online Cheap quotes car insurance have completely changed the way people buy their car insurance plan. It is point of fact the speediest and best unique alternative for finding our favored procedure. In any case, the things may not be so normal for the people who have a dubious record as a shopper. Like whatever other purchase, cheap quotes car insurance industry in like manner considers FICO evaluation with high criticalness before offering a way to deal with the customers. Some without a doubt comprehended companies have now stopped dealing with these customers completely.…

    • 580 Words
    • 3 Pages
    Improved Essays
    Read More
  • Great Essays

    Cause And Effect Of The Great Recession
    • 958 Words
    • 4 Pages

    Cause And Effect Of The Great Recession

    The global derivative market had reached nearly 530 trillion dollars and the global Credit Default Swap (CDS) market was up to 62 trillion by mid-2008. Of the 62 trillion dollars in CDS, 80 percent were reportedly speculative. American International Group (AIG) had sold 440 billion in CDS that were tied to mortgage securities. The company was not required to have a stockpile of reserves or collateral due to their high credit rating. However, rating agencies were paid by the bank or company that they were supposed to be rating, causing ratings to be high.…

    • 958 Words
    • 4 Pages
    Great Essays
    Read More
  • Improved Essays

    Discount Cash Flow Model
    • 1257 Words
    • 5 Pages

    Discount Cash Flow Model

    Moreover, the lower capital expenditure in future years also can be an evidence of improved trend of free cash flow. Therefore, if we applied for this series of free cash flow in the discount model, these inputs can effectively show the intrinsic value of Royal mail. Terminal value In my discount model, the terminal growth rate is 0.5% and the WACC rate is 8.3%, with the group EBIT margin of 6.5%. For the estimation of terminal value, we applied for a constant growth formula which equals to the 2017FYE’s forecasted FCF divided by the difference between discount rate and terminal growth rate(g).…

    • 1257 Words
    • 5 Pages
    Improved Essays
    Read More
  • Improved Essays

    Advantages Of North American Union
    • 3474 Words
    • 14 Pages

    Advantages Of North American Union

    The European Union and North American Free Trade Agreement The European Union (EU) and the North American Free Trade Agreement (NAFTA) are two regional trade agreements that promote the trade of goods, people, and services across borders. Both of these regional trade agreements help their member regions reduce or eliminate trade restrictions, quotas, and tariffs. By implementing regional trade agreements, the member regions can improve their economy and promote trade growth throughout the region. From the many regional trade agreements located throughout the world, the European Union and the North American Free Trade Agreement compare and contrast in regards to the requirements and membership qualifications.…

    • 3474 Words
    • 14 Pages
    Improved Essays
    Read More
  • Decent Essays

    Risk In Dreaming Research Paper
    • 297 Words
    • 2 Pages

    Risk In Dreaming Research Paper

    AMITY LAW SCHOOL, DELHI ECONOMICS PSDA (RESEARCH PAPER) TOPIC- RISK IN LENDING BY: SAKSHI SABHARWAL ROLL NO- 09910303814 SHUBHANGI SHARMA ROLL NO-09210303814 ABSTRACT…

    • 297 Words
    • 2 Pages
    Decent Essays
    Read More
  • Great Essays

    Interest Rate Parity Essay
    • 1113 Words
    • 5 Pages

    Interest Rate Parity Essay

    Aims & Their Importance Our aim is to find out if there is Interest Rate Parity (IRP) between the USA and China, over an annualised period of 10 years (April 2005-April 2015). We think that this is an important topic as the US are the current global economic superpower, and China is an up and coming power. Also, as there is a lot of trade between the two countries, and we know that china is highly dependant on their exports for GDP growth. A higher Yuan causes exports to slow ( 1% decline for every 10% increase in Yuan), leading to slower economic growth. As economic growth slows, their economy becomes more risky, which adds a risk premium to their interest rates in order to compensate investors for a riskier investment in their economy, as…

    • 1113 Words
    • 5 Pages
    Great Essays
    Read More
  • Improved Essays

    Pacific Grove Spice Company Case Summary
    • 1379 Words
    • 6 Pages

    Pacific Grove Spice Company Case Summary

    Furthermore, by sponsoring the program, Pacific Grove will have a positive NPV with an IRR of 41.28% (Exhibit 3). The initial investment to sponsor the program will be $1,440,000 and other maintenance expenses in future years. However, by using the lowest WACC of 10%, the project produces an NPV of $3,278,174, which makes it profitable. Also, higher WACC's of 20% and 30% produce positive NPV and increase cash flows for Pacific Grove (Exhibit…

    • 1379 Words
    • 6 Pages
    Improved Essays
    Read More
  • Decent Essays

    Inari Amertron Berhad Case Study
    • 1444 Words
    • 6 Pages

    Inari Amertron Berhad Case Study

    Investment Summary We issue a BUY recommendation on Inari Amertron Berhad (INRI) with a target price of RM4.98 using the Discounted Cash Flow (DCF) method. This offers a 20.29% of upside from its closing price of RM4.14 on 1 December 2015. Our TP of RM4.98 implies a FY16 PE of 23.13x as we believe that INRI deserved to be trading at a premium due to its stronger growth potential with various buying points such as 1) Bright Prospects of RF Segment due to higher RF content in smartphone driven by increasing adoption of LTE network [Refer to Figure 8]]2) More Potential Outsourcing Opportunities 3) Beneficiary of Strong USD which is favorable to them as a major exporter.…

    • 1444 Words
    • 6 Pages
    Decent Essays
    Read More
  • Great Essays

    Copula Function Approach
    • 1169 Words
    • 5 Pages

    Copula Function Approach

    Li (2000) introduced copula function approach in the aspect of evaluating credit derivatives, the copula function has gradually become the main approach in pricing CDO (Burtschell & George, 2005). In Li (2000) paper, a new random variable named ‘time-until-default’ was created to demonstrate survival time of each defaultable entity. And the copula function approach is based on this random variable to evaluate the default probability of financial instruments. Specifically, copula function specify the joint distribution of the survival times after using the market information to derive the marginal distribution of the survival time. This approach solves the default correlation and the joint distribution of the pool asset to some extent, and it…

    • 1169 Words
    • 5 Pages
    Great Essays
    Read More
  • Improved Essays

    The Pros And Cons Of Modern Portfolio Theory
    • 1111 Words
    • 5 Pages

    The Pros And Cons Of Modern Portfolio Theory

    Fundamental principle of investment is the relationship between the risk and return tradeoff, where if there is high risk it will compensate with high return as well as the low risk with lower return. The risk can be classified into two types which are systematic (uncontrollable) risk and unsystematic (controllable) risk. The examples of systematic risk are the interest rate risk, inflation risk, foreign exchange risk, country risk, political risk and market risk. Meanwhile, the example of unsystematic risk is business risk, liquidity risk and credit risk. However, all this risk can be diversified which by creating a well-diversified portfolio.…

    • 1111 Words
    • 5 Pages
    Improved Essays
    Read More

Related Topics

Ready To Get Started?
Discover
Company
Follow
©2024 Cram.com
Privacy Policy |  About Ads |  Site Map |  Advertise  | 
  • Cookie Settings