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Yield Curve Estimation

In: Business and Management

Submitted By Francis77
Words 2657
Pages 11
Financial Modelling – Session VII

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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