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Submitted By Francis77

Words 2657

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Words 2657

Pages 11

Email: jcadete@clsbe.lisboa.ucp.pt

Financial Modelling

Joaquim

Joaquim Cadete Cadete

1

How your work is going to be scored?

Svensson Model:

IR Swaps:

CIR Model:

Modeling

Formalization (6)

Functions

Efficiency Gains (3)

Functions

Efficiency Gains (3)

Further Improvements (5)

Efficiency Gains (3)

User’s

Perspective

Your Grade

Financial Modelling

Joaquim Cadete

2

Risk Management: the main concern…

Counterparty risk

Credit risk

Interest rate risk

Capital risk and solvency Funding risk

Risk

Management

Reputational risk Foreign exchange risk

Off-balance sheet risk Operational risk Financial Modelling

Market or trading risk Sovereign risk Regulatory risk

Joaquim Cadete

3

Risk and Return Theories

Diversification

Standard deviation of portfolio return

σ

Unsystematic or diversifiable risk

Systematic or

Total risk

market-related risk Number of holdings

Financial Modelling

Joaquim Cadete

4

Interest rate risk: the first layer of volatility…

Operational Risk: Betas.

Operational risk

Systematic risk or nondiversifiable risk

Unsystematic or diversifiable risk

A

Total Risk

Shareholders’ risk

A

E

E

A

E

A= E

Financial Modelling

Joaquim Cadete

5

Interest rate risk: the first layer of volatility…

Operational Risk: Betas.

If A = E, then

RA = Rf + βA (RM – Rf).

And

1

= = −

Assuming that the company is already at the stage of infinite stable growth.

Financial Modelling

Joaquim Cadete

6

Interest rate risk: the first layer of volatility…

200%

175%

Market Value as % of the Initial Investment 1

150%

125%

100%

75%

50%

1: APV calculation for an unleveraged firm

Financial Modelling

Joaquim…...

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