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Unified Financial Analysis Risk & Finance Lab

Unified Financial Analysis Risk & Finance Lab. Chapter 9: Value and Income Willi Brammertz / Ioannis Akkizidis. Value and income. Valuation Why can value differ?. Different views on market evolution. Different book keeping methods. On value. What is book value?

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Unified Financial Analysis Risk & Finance Lab

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  1. Unified Financial Analysis Risk & Finance Lab Chapter 9: Value and Income Willi Brammertz / Ioannis Akkizidis

  2. Value and income

  3. ValuationWhy can value differ? Different views on market evolution Different book keeping methods

  4. On value • What is book value? • Difference between market and book value? • Tension between • Book keepers and rocket scientists • Actuaries and asset managers • The special role of fair value / NPV • Parallel valuation

  5. Parallel Valuation • Must be possible • Note: • There is a single set of events • All values derive from the same set of events • Full consitency between different valuation methods

  6. Parallel valuation • Cash flows and events are independent of valuation • Only the traject of P/D(ß) changes • Many P/D(ß) can be calculated and stored in parallel

  7. Overview

  8. OverviewTime dependent

  9. OverviewMarket dependent

  10. Book keeping and Chart of account • Is a chart of account neccesary for book keeping? • Chart of account: Representation of a product catalogue • What is the role of the chart of account • In static analysis • In dynamic analysis • Value and chart of accounts

  11. Value and incomeScientific bookkeeping

  12. Scientific book keeping • The different bookkeeping methods βare only concerned with the calculation of • P/D(ß) • ΔP/D(ß)

  13. Nominal value } =0

  14. The big four • Nominal value • Historic value • Amortized Cost • Market value (primus inter pares)

  15. Nominal value, write off at beginning

  16. Amortized cost mustbe a constant This is the case under the following condition

  17. Amortized cost

  18. Historic value / write off at end

  19. Mark to market / fair value

  20. Market value / mark to market / fair value and NPV • Observed market value is without accruals • Fair value ≈ mathematically calculated value of non traded positions assuming similar conditions • NPV is fair value including accruals • Accruals: difference between market and arbitrage free NPV

  21. Other book keeping methods in the financial sector • Linear • To maturity • To repricing • Lower of cost or market • Minimum value principle

  22. Linear write off If rate resets: write off usually till next rate reset point

  23. Lower of cost or market

  24. Minimal value

  25. What is „Expected Cash-Flow“ based value? • Compatible with IFRS? • Alternative to fair value? • Trick of regulators? • Hidden present for the „too big to fail“ banks • Valuation on a risk neutral or near rick neutral basis • Excludes the propper risk premium

  26. FX • Only 2 rules (Φ) • Mark to market • Historic value

  27. Impairment • Impairment: Credit risk (*) related value reductions

  28. Operational: P&L and capitalization

  29. Operational: Investments • What makes investments (and P&L effects) so different? • Different methods of writing off • Linear • Geometric • Sum of digits

  30. IFRS 32, 39 • Allowed Book keeping methods • Nominal • (Historic) • Amortized cost • Fair value / Market value • Critique on fair value book keeping

  31. IFRS 32, 39: Hedge AccountingDesignation and de-designation

  32. IFRS 32, 39: Hedge testingEx ante, ex post

  33. Funds Transfer Pricing (FTP)Profit Centers

  34. Profitability of a single financial transaction: Interest Income (Expense) ./. Transfer Expense (Income) = Gross Income (Deckungsbeitrag I, Net Contribution I) ./. Cost of the transaction (Salaries, paper etc.) = Net Income (Deckungsbeitrag II, Net Contribution II) Cost of transaction: See chapter 7 (Activity Based Cost Allocation) FTP and profitability

  35. FTP, cost accounting and contributionanalysis NII(ti-ti+1) , Allocated Cost(ti-ti+1) Profitability of a Profit-Centre (Product, …) =Sum of Net Income of all transactions belonging to the Profit-centre (Product …)

  36. Integrating risk and return Rate VA σr VL Time tL tA Δ t RISK

  37. FTP and return Interest o Total Margin Y1 5 % • 4.5 % o Term to maturity 6 % o Yield curve o 5.6 % TM 5 1 5

  38. FTP and risk and return Yield curve t1 6 % o Total Margin Y2 Yield curve t0 o o 5.6 % TM o 4 Interest 0 -1 1 Term to maturity

  39. Funds Transfer Pricing (FTP)Margin calculation

  40. The NPV view on FTP

  41. Funds Transfer Pricing (FTP)Non maturity contracts

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