Unified Financial Analysis Risk Finance Lab Chapter 8

Unified Financial Analysis Risk & Finance Lab Chapter 8: Financial Events and Liquidity Willi Brammertz / Ioannis Akkizidis © Brammertz Consulting, 2009 Date: 27. 02. 2021 1

From input to analysis elements Cost © Brammertz Consulting, 2009 Date: 27. 02. 2021 2

Static analysis (liquidation view) Type I and II analysis Assets Existing Business Time Existing Business Liabilities t 0 NPV Volatility in t 0 ( ) Yield Time to Maturity © Brammertz Consulting, 2009 Date: 27. 02. 2021 3

Contract events and cash flows > Contract events are the expression of the input elements on the time line given a state of the risk factors (state contingent cash flows) > Contract events are a level higher than cash-flows > Contract events are interpreted in two principally different ways © Brammertz Consulting, 2009 Date:

Importance of event level > Rock bottom: The event level contains all information that is possible in finance > Precondition: The input elements must be rich > Contracts and behavior as open dimensions > All financial contracts are homogenous on the event level > E. g. a saving contract and an option „are equal“! > Question: Where are the events in option pricing? © Brammertz Consulting, 2009 Date:

The five analysis elements © Brammertz Consulting, 2009 Date: 27. 02. 2021 6

Two main distinctions Liquidity vs value-income view Liquidity © Brammertz Consulting, 2009 ZES (Chapter 10) Date: 27. 02. 2021 7

List of important event types (Risk. Pro™) © Brammertz Consulting, 2009 Date:

Events on the time line Example: Variable annuity © Brammertz Consulting, 2009 Date: 27. 02. 2021 9

Example of events Mathematics (Valuation) kicks in only after the Explicit representation of the events. © Brammertz Consulting, 2009 Date: 27. 02. 2021 10

Example 1: Money market © Brammertz Consulting, 2009 Date: 27. 02. 2021 11

Example 2: Fixed bond © Brammertz Consulting, 2009 Date: 27. 02. 2021 12

Example 3: RGM with draw down © Brammertz Consulting, 2009 Date: 27. 02. 2021 13

Example 4: Variable rate bond © Brammertz Consulting, 2009 Date: 27. 02. 2021 14

Example 5: Variable annuity Pattern © Brammertz Consulting, 2009 Date: 27. 02. 2021 15

Example 5: Variable annuity Events © Brammertz Consulting, 2009 Date: 27. 02. 2021 16

Example 6: Swap > A swap is the simple sum of two basic contracts (example 2 + example 4) © Brammertz Consulting, 2009 Date: 27. 02. 2021 17

Example 6: Swap © Brammertz Consulting, 2009 Date: 27. 02. 2021 18

Example 7: FRA © Brammertz Consulting, 2009 Date: 27. 02. 2021 19

Example 8: Effect of behavior © Brammertz Consulting, 2009 Date: 27. 02. 2021 20

Liquidity gap > Cash management vs. Liquidity gap > Gap: numerical or graphical representation of liquidity flows on the time line > Needs definition of time buckets > Calculation: > Sum expected cash flows (forward scenario) over all relevant contracts > Group per time bucket © Brammertz Consulting, 2009 Date: