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Financial Risk and Asset Valuation - Coggle Diagram
Financial Risk and Asset Valuation
Interest Rate Risk
Duration
Interest rate immunization
Convexity
Dmac & Dmod
Taylor approx.
Partial dollar duration, DV
Key rate duration
Risk Measures
Value-at-Risk
Backtesting
Kupiec
Basel traffic light test
Christoffersen
H0: Violations and non-violations are independent over time
H1: Violations and non-violations are dependent over time (Markov chain)
Calculate number of transitions and divide by total transitions
Decomposing
CVaR
IVaR
"Explain why an asset w/ neg. IVaR may have pos. CVaR"
Expected Shortfall
Backtesting
Acerbi-Szekely
Costanzino-Curran
Coherency
Subadditivity
"Show for estimated VaR under normal distribution"
Simulations
BHS
Time-weighted
Volatility weighted
Parametric
Credit risk
Credit risk
Models
Merton
Probability of default, PD
PD=N(-DD)
Distance-to-default, DD
d1=DD (se formelblad)
Credit metrics
Estimate asset correlation
Credit VaR
Moody's
KMV-EDF
Primarily outputs a EDF, empirical default frequency. Industry standard. Reincarnation of the Merton model. Uses different mapping -> higher PD than Merton for "normal" levels of DD, based on a function of historical relation between PD and DD
f(x) = backwards looking, DD = forwards looking
Biggest difference to Merton: default can happen at any time t and not only at T. Also, we don't map with PD=N(-DD)
Down-and-out call option for equity on assets, implying if price falls below a threshold (barrier, Bt) the option (equity) has zero value. If not -> standard Merton model call option
Basel regulation
Market risk
Credit risk
Operational risk
Vasicek-Basel
WCDR
Monte-Carlo simulation
Credit VaR
Derivatives
CDS
CDS spread
FRA
IRS
CCS
Fixed-for-floating
Similar to IRS but payments in different exchange rates