Please enable JavaScript.

Coggle requires JavaScript to display documents.

Eksamen FRM (CASE 3 (Term structure of interest rates (What is it? (Set of…

- - - - Price risk
      - Reinvestment risk
      - Prepayment risk
      - Extension risk
  - - - Set of spot rates
      - From today until the future (30+ years)
      - Normally upward sloping
      - Can be: Upward and downward sloping, humped or flat
    - - Expectations theory
      - Liquidity preference theory
      - The preferred habitat theory
    - - Qualitative assessments (score economic data such as unemployment rate, inflation, exchange rates, and so on) (or a view of the likely economic conditions in the forecasting period)
      - Econometric models
  - - - Historical volatility
        
        Measure of the dispersion of actual asset price movements over a given time period in the past.
      - Implied volatility
        
        Backed out of option pricing (black-scholes)
      - Forecasted volatility
        
        Economic, fundamental and technical analysis
  - - - assumptions?
        
        Assumes normal distribution (but: fat tails and skewed)
        
        Assumes stability (but: prices move in same direction in crashes)
        
        BUT: VaR for a diversified portfolio will always be lower than an undiversified one
- - - - 3 STEPS
        
        Model the situation
        
        Specify a set of random numbers that correspond to the chance of a given outcome (this would be based on probabilities linked to historical data)
        
        Select numbers and calculate the present value of the cash flows at risk
    - - Simulation models will require a large number of trails in order to give correct results.
      - Analytic models provide unique answers given the variables used
      - Simulation models work well with complex cases, whereas analytic models work best on simple problems
    - - A simulation technique will randomly generate a set of values for each risk factor and this is then built into a risk model to give a quantitative estimate of the risk of that position.
  - - - Only two cashflows
      - Low price risk
      - Low reinvestment risk
    - - Usually more than one cashflows
      - Greater price risk and reinvestment risk
      - Floating rate less risk -> Can be seen as multiple short term bonds after eachother