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Session 7 Review (Merck), VaR, Securitization

Session 7 Review (Merck), VaR, Securitization. Asset Backed Securities (Securitization， 証券化). Asset. Cash flows are essential. CF generated by asset. Security is issued based on the CF generated by the asset. Asset in question is separated from company (originator). Originator.

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Session 7 Review (Merck), VaR, Securitization

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  1. Session 7Review (Merck), VaR, Securitization

  2. Asset Backed Securities(Securitization，証券化) • Asset. • Cash flows are essential. CF generated by asset. • Security is issued based on the CF generated by the asset. • Asset in question is separated from company (originator). N. Takezawa (ICU) 2001

  3. Originator Special Purpose Vehicle (SPV) Credit Enhancement Securities Firm, Bank (underwrite) Rating Agencies Investor N. Takezawa (ICU) 2001

  4. Securitizing Building • Examples Toho Insurance and Daiwa Insurance. Very recently-Long Term Credit Banks HQ Bldg. • In general, SPC issues bond (security) based on CF of building. • Merits: Company can reduce assets thus increase ROA. Investors can invest in just the “building” and not the company in question. N. Takezawa (ICU) 2001

  5. Collateralized Mortgage Obligations (CMO)モーゲージ担保債務証書 • Form a pool of MBS and/or housing loans (mortgages). • Re-package and bundle into tranches. • Tranches formed according to prepayment risk, maturity, interest etc. N. Takezawa (ICU) 2001

  6. Short-term investors Tranche one Tranche two Long-term investors Tranche three maturity N. Takezawa (ICU) 2001

  7. Value-at-Risk (VaR) • The amount of money that a firm can lose (or gain) due to changes in prices of underlying assets. • It is a statistical “forecast” based on historical data. • It is a number (s). • Look at hand-outs (graphs) N. Takezawa (ICU) 2001

  8. Value-at-Risk (VaR) • Using current prices we can determine the current value of our portfolio (cash flows). • Then we conduct a simulation. The price is allowed to vary (randomly). Thus, we can value our current portfolio using “forecasted” prices. • Plot the difference between the current value of the portfolio and simulated portfolio value. • This should give us a distribution. N. Takezawa (ICU) 2001

  9. Current FX Rate Current Cash Flow Take Difference Simulated FX Rate Forecasted Cash Flow Simulated FX Rate Forecasted Cash Flow N. Takezawa (ICU) 2001

  10. Cash Flows • We need a model (planning model) • Forecast the revenue • Forecast the expenditures • Given different FX (prices) rates we can then determine the net income. • Graph (frequency distribution) net income to get a distribution. N. Takezawa (ICU) 2001

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