A New Model for Interest Rates

1998 ◽  
Vol 01 (02) ◽  
pp. 195-226 ◽  
Author(s):  
D. Epstein ◽  
P. Wilmott
Keyword(s):  
Interest Rates ◽  
Cash Flows ◽  
Fixed Income ◽  
Hyperbolic Partial Differential Equation ◽  
Present Value ◽  
Short Term ◽  
First Order ◽  
Bond Options ◽  
New Perspective ◽  
Set Up

There are many theories and models underlying the valuation of fixed income security portfolios. This work addresses the problem from a new perspective: the objective is to find a lower bound for the value of a portfolio of cash flows. We set up conditions for the evolution of a short-term interest rate and value a liability using its present value. We formulate a first-order nonlinear hyperbolic partial differential equation for the value, V, of the portfolio. We explore the solution of this equation and then hedge our portfolio with market-traded zero-coupon bonds of known value. We include some salient examples — generating the Yield Envelope and valuing caps, floors and bond options.

scholarly journals ALTERNATIVE ASSESMENT OF INVESTMENT VALUE IN INNOVATIVE PROJECTS

2019 ◽  
pp. 20-21
Author(s):  
A. I. Sobolev
Keyword(s):  
Interest Rates ◽  
Cash Flows ◽  
Short Term ◽  
Market Values ◽  
Investment Value ◽  
Standard Assessment ◽  
Real Value

Standard assessment of innovative projects involves procedures for discounting of the expected cash flows. In the short term, their real value can vary significantly, and that will cause significant differences between the current market values of the contracts and their estimated values at the time of investment risks taking. Use of the investments assessment based on the market interest rates allows performing more accurate evaluations of the results of the planned investments and optimizing their structure.

scholarly journals The Financial Valuation Risk in Pepper Production: The Use of Decoupled Net Present Value

Mathematics ◽  
2020 ◽  
Vol 9 (1) ◽  
pp. 13
Author(s):  
Josefa López-Marín ◽  
Amparo Gálvez ◽  
Francisco M. del Amor ◽  
Jose M. Brotons
Keyword(s):  
Interest Rates ◽  
Risk Evaluation ◽  
Net Present Value ◽  
Cash Flows ◽  
Present Value ◽  
Financial Valuation ◽  
Production Activity ◽  
Quality Water ◽  
Future Cash Flows ◽  
Over Time

Greenhouse peppers are one of the most important crops globally. However, as in any production activity, especially agricultural, they are subject to important risk factors such as price fluctuations, pests, or the use of bad quality water. This article aims to evaluate the viability of these types of crops by using discounted cash flows. Risk evaluation has been carried out through the analysis of pepper plantations for 2016 and 2017. The traditional application of this tool has significant limitations, such as the discount rate to be used or the estimation of future cash flows. However, by using discount functions that decrease over time in combination with decoupled net present value, these limitations are expected to improve. The use of decoupled net present value has permitted an increase in the accuracy and quantification of risks, isolating the main risks such as price drops (EUR 3720 ha−1 year−1) and structural risks (EUR 1622 € ha−1 year−1). The use of decreasing discount functions has permitted a more realistic investment estimation. Finally, the sensitivity analysis shows that decoupled net present value (DNPV) is little affected by changes in interest rates in contrast to traditional net present value (NPV).

scholarly journals Steadiness of expectation theory measured by swaption curve

2021 ◽  
Vol 3 (2.1) ◽  
pp. 6-26
Author(s):  
Antonio Ruben Santillan Pashma
Keyword(s):  
Interest Rate ◽  
Financial Crisis ◽  
Interest Rates ◽  
Banking Sector ◽  
Fixed Income ◽  
Short Term ◽  
High Volatility ◽  
Expectation Theory ◽  
One Year ◽  
Premium Risk

The financial crisis that broke out in mid-2007 has spread in the existing financial system with great instability favoring the devaluation of currencies with the fall in market interest rates. This has caused potential investors to become more risk-averse and therefore, look for financial products, although lower profitability, also poses less risk. Following this line, it is the Fixed Income assets that have acquired greater prominence in these times of crisis.  This article highlights the strength of the expectation theory in different tranches, using EURIBOR rate to determine implicit forwards, and estimate the price of a one-year swap contract with 3 months of maturity,  and comparing in every moment with the real prices of swap as a benchmark. SWAP is the bigger derivative inside of the group of Fixed Income Assets.  After the quantitative analyst, it has been observed how the theory prevails of sceneries of low volatility but falls on sceneries when the volatility starts to increase. Introduction.  One of the basic assumptions about financial theory is talking about the expectations theory. Since the middle of the eighties, this theory has been used as the unbiased estimator to calculate the swap interest rate in the base of the spot bank interest rate. Aim. Quantitativa analyst of the steadiness of expectations theory in differents economical cycles, using the European Central bank as the source to get hold of the EURIBOR spot rates for 3 months, 6 months, 9 months, and 12months from 2004 to 2016. Results. During the periods before the crisis 2007, the prices of the IRSWAP are almost adjusted between the market and what the financial theory says. The situation starts to change after the financial crisis when the volatility of the market starts to increase due to the instability of the banking sector and traders started with speculations strategies forgetting the aim of hedging, operating, new positions the majority in the short term. Conclusion. Whether for speculative reason or interventions actions of the monetary authority, the theory e “EXPECTATIONS THEORY”, it is not an efficient predictor with out using a premium risk, during the periods of high volatility.

Residual Earnings Valuation With Risk and Stochastic Interest Rates

1999 ◽  
Vol 74 (2) ◽  
pp. 165-183 ◽  
Author(s):  
Gerald A. Feltham ◽  
James A. Ohlson
Keyword(s):  
Interest Rates ◽  
Theoretical Work ◽  
Cash Flows ◽  
Present Value ◽  
Stochastic Interest Rates ◽  
No Arbitrage ◽  
Book Value ◽  
Valuation Model ◽  
Stochastic Interest ◽  
Capital Charge

This paper provides a general version of the accounting-based valuation model that equates the market value of a firm's equity to book value plus the present value of expected abnormal earnings. Prior theoretical work (e.g., Ohlson 1995; Feltham and Ohlson 1995, 1996) assumes investors are risk neutral and interest rates are nonstochastic and flat. Our more general analysis rests on only two assumptions: no arbitrage in financial markets and clean surplus accounting. These assumptions imply a risk-adjusted formula for the present value of expected abnormal earnings. The risk adjustments consist of certainty-equivalent reductions of expected abnormal earnings. A key issue deals with the capital charge component of abnormal earnings. It is measured by applying the (uncertain) riskless spot interest rate to start-of-period book value. Risks do not affect the rate used in the capital charge, and accounting policies do not affect the formula's constructs. An application of the general formula shows how the classic risk-adjusted expected cash flows model derives as a special case.

scholarly journals SEQUENTIAL CAPITAL INVESTMENT DECISION MAKING UNDER EXTREME CASH FL OW SITUATIONS: EVIDENCE USING MONTE CARLO SIMULATION

2015 ◽  
Vol 16 (5) ◽  
pp. 877-900 ◽  
Author(s):  
Wenqing Zhang ◽  
Prasad Padmanabhan ◽  
Chia-Hsing Huang
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Capital Investment ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Present Value ◽  
Short Term ◽  
Value Analysis

Uncertainty influences a decision maker's choices when making sequential capital investment decisions. With the possibility of extremely negative cash inflows, firms may need to curtail operations significantly. Traditional Net Present Value analysis does not allow for efficient management of these problems. In addition, firm managers may behave irrationally by accepting negative Net Present Value projects in the short term. This paper presents a Monte Carlo simulation based model to provide policy insights on how to incorporate extreme cash flows and manager irrationality scenarios into the capital budgeting process. This paper presents evidence that firms with irrational managers and experiencing extremely negative cash flows may, under certain conditions, reap long term rewards associated with the acceptance of negative Net Present Value projects in the short term. These benefits are largest if cost ratios (discount rates) are small, or investment horizons are high. We argue that acceptance of short term negative Net Present Value projects implies the purchase of a long term real option which can generate positive long term cash flows under certain conditions.

scholarly journals Um Modelo Unificado para a Previsão da Estrutura a Termo de Taxa de Juros

2018 ◽  
Vol 16 (2) ◽  
pp. 337
Author(s):  
Ailton Cassettari ◽  
Jose Raymundo Novaes Chiappin
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Empirical Evaluation ◽  
Future Price ◽  
Fixed Income ◽  
Short Term ◽  
Hjm Model ◽  
Analytical Expressions ◽  
Future Date ◽  
Over Time

The focus of the paper is to present a new methodology for forecasting the Term Structure of Interest Rates (ETTJ). The objective is to answer the question: given the ETTJ curve at any given time, what is the ETTJ at a future date? Thus, we seek to construct an analytical expression for the prediction of an entire curve and not only for a given future price of any asset. This objective requires a predominantly analytical and theoretical approach rather than empirical or econometric. The characteristic of this approach is the development of a "hybrid" model, describing the evolution and dynamics of the ETTJ curve over time, combining three elements: a particular version of the HJM model, the Nelson-Siegel-Svensson parameterization, and an independent modeling of the short-term rate, via Hull-White model. As results are obtained analytical expressions for quantities of importance in the fixed income markets. Not being the focus of this work, the empirical evaluation appears only as an illustration, and a more rigorous empirical analysis is left for another article.

Valuing and Analyzing Mortgage-Backed and Asset-Backed Securities

2019 ◽  
pp. 477-498
Author(s):  
Matthew Dyer
Keyword(s):  
Interest Rates ◽  
Intrinsic Value ◽  
Simulation Method ◽  
Cash Flows ◽  
Monte Carlo Simulation Method ◽  
Fixed Income ◽  
Fixed Income Securities ◽  
Default Rates ◽  
Mortgage Backed Securities ◽  
Asset Backed Securities

This chapter discusses how to value and analyze asset-backed securities (ABSs) with an emphasis on mortgage-backed securities (MBSs). Valuation differs fundamentally from traditional fixed-income securities due to the risks presented by fluctuations in the securities’ monthly cash flows derived from unscheduled principal repayments. For an MBS, prepayments, which are largely a function of interest rates, housing turnover, refinancing sensitivity, burnout, and a host of borrower inefficiencies, can cause drastic fluctuations in the security’s theoretical or intrinsic value. Once an estimate of forecasted prepayment rates and default rates, if applicable, has been calculated, monthly cash flows are determined and discounted at the appropriate discount rate. Spread measures such as the zero-volatility spread (Z-spread) and the option-adjusted spread can be used to approximate the necessary discount rates applicable to monthly cash flows, the latter of which can be calculated via the Monte Carlo simulation method.

Perspectives on inflation Targeting Regime in Russia

2014 ◽  
pp. 107-121 ◽  
Author(s):  
S. Andryushin
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Short Term ◽  
Indirect Control ◽  
Financial Account ◽  
Domestic Prices ◽  
Macroeconomic Indicators ◽  
Private And Public

The paper analyzes monetary policy of the Bank of Russia from 2008 to 2014. It presents the dynamics of macroeconomic indicators testifying to inability of the Bank of Russia to transit to inflation targeting regime. It is shown that the presence of short-term interest rates in the top borders of the percentage corridor does not allow to consider the key rate as a basic tool of monetary policy. The article justifies that stability of domestic prices is impossible with-out exchange rate stability. It is proved that to decrease excessive volatility on national consumer and financial markets it is reasonable to apply a policy of managing financial account, actively using for this purpose direct and indirect control tools for the cross-border flows of the private and public capital.

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