This document outlines two methods for valuing collateralized debt obligations (CDOs): Moody's Binomial Expansion Technique (BET) and the Duffie-Garleanu methodology. The BET method models default and correlation in a CDO collateral pool to generate loss scenarios. It is implemented in an Excel VBA program. The Duffie-Garleanu methodology also models default and correlation to value contingent cash flows to CDO tranches. Both methods aim to calculate value at risk for CDO tranches.
This document contains check your progress questions and answers from modules on balance sheet management, liquidity management, and interest rate risk management. Some key points:
- Asset liability management (ALM) is required to minimize liquidity risk and market risk by matching assets and liabilities.
- Liquidity management objectives are to ensure both profitability and liquidity by meeting deposit withdrawals and loan demands. A bank's liquidity position depends on sources of funds and anticipated future needs.
- Interest rate risk arises from changes in interest rates that affect the market value of assets and liabilities. It can be managed by matching repriceable assets with liabilities and setting tolerance limits on interest rate sensitivity gaps.
This document discusses foreign exchange settlements and the risks involved. It notes that foreign exchange transactions involve settlement risk, which is the risk that one party pays in one currency but does not receive the currency it bought. Settlement risk includes credit risk, liquidity risk, operational risk, and replacement risk. The settlement process for foreign exchange transactions is not coordinated between payment systems for different currencies. This lack of coordination can result in several days elapsing between payments in each currency, exposing parties to settlement risk. The establishment of CLS Bank helped reduce settlement risk by coordinating the settlement of different currencies.
The CLS system was created to eliminate settlement risk in foreign exchange transactions. It uses a payment-versus-payment mechanism to ensure simultaneous settlement of both sides of a foreign exchange trade. CLS settles transactions on a gross basis but nets out payment flows to reduce liquidity costs for participants. It has over 60 direct members and 6000 indirect members settling an average of $4 trillion per day across 17 currencies. CLS significantly reduces systemic risk in the global foreign exchange market.
This document discusses how exotic financial instruments like CMOs, POs, IOs, and CDS contributed to the 2007-2009 financial crisis. CMOs and MBS fueled demand for mortgages, leading to lower credit standards and risky subprime loans. POs and IOs allowed investors to bet on or hedge against mortgage prepayments but increased exposure to default risk. CDS were used like insurance on MBS but sellers failed to reserve properly against losses. Together these instruments obscured risk and spread it widely, facilitating the growth of a mortgage bubble that burst and caused the financial crisis when subprime loans defaulted.
This document contains 30 multiple choice questions related to risk management. The questions cover topics like market risk, yield curve risk, operational risk, asset liability management, and derivatives. Correct answer options are provided for each question to test understanding of risk management concepts.
Skiera, Bernd / Bermes, Manuel / Horn, Lutz (2011), "Customer Equity Sustainability Ratio: A New Metric for Assessing a Firm’s Future Orientation", Journal of Marketing, Vol. 75 (May), 118-131
Bank sources of funds include capital notes and bonds, as well as bank capital accounts. Bank capital accounts serve as an equity base for deposits, and act as a residual source of funds from shareholders that is used to absorb losses and protect depositors.
This document contains check your progress questions and answers from modules on balance sheet management, liquidity management, and interest rate risk management. Some key points:
- Asset liability management (ALM) is required to minimize liquidity risk and market risk by matching assets and liabilities.
- Liquidity management objectives are to ensure both profitability and liquidity by meeting deposit withdrawals and loan demands. A bank's liquidity position depends on sources of funds and anticipated future needs.
- Interest rate risk arises from changes in interest rates that affect the market value of assets and liabilities. It can be managed by matching repriceable assets with liabilities and setting tolerance limits on interest rate sensitivity gaps.
This document discusses foreign exchange settlements and the risks involved. It notes that foreign exchange transactions involve settlement risk, which is the risk that one party pays in one currency but does not receive the currency it bought. Settlement risk includes credit risk, liquidity risk, operational risk, and replacement risk. The settlement process for foreign exchange transactions is not coordinated between payment systems for different currencies. This lack of coordination can result in several days elapsing between payments in each currency, exposing parties to settlement risk. The establishment of CLS Bank helped reduce settlement risk by coordinating the settlement of different currencies.
The CLS system was created to eliminate settlement risk in foreign exchange transactions. It uses a payment-versus-payment mechanism to ensure simultaneous settlement of both sides of a foreign exchange trade. CLS settles transactions on a gross basis but nets out payment flows to reduce liquidity costs for participants. It has over 60 direct members and 6000 indirect members settling an average of $4 trillion per day across 17 currencies. CLS significantly reduces systemic risk in the global foreign exchange market.
This document discusses how exotic financial instruments like CMOs, POs, IOs, and CDS contributed to the 2007-2009 financial crisis. CMOs and MBS fueled demand for mortgages, leading to lower credit standards and risky subprime loans. POs and IOs allowed investors to bet on or hedge against mortgage prepayments but increased exposure to default risk. CDS were used like insurance on MBS but sellers failed to reserve properly against losses. Together these instruments obscured risk and spread it widely, facilitating the growth of a mortgage bubble that burst and caused the financial crisis when subprime loans defaulted.
This document contains 30 multiple choice questions related to risk management. The questions cover topics like market risk, yield curve risk, operational risk, asset liability management, and derivatives. Correct answer options are provided for each question to test understanding of risk management concepts.
Skiera, Bernd / Bermes, Manuel / Horn, Lutz (2011), "Customer Equity Sustainability Ratio: A New Metric for Assessing a Firm’s Future Orientation", Journal of Marketing, Vol. 75 (May), 118-131
Bank sources of funds include capital notes and bonds, as well as bank capital accounts. Bank capital accounts serve as an equity base for deposits, and act as a residual source of funds from shareholders that is used to absorb losses and protect depositors.
Check your progress module c treasury managementVinayak Kamath
This document contains multiple choice questions from various units of a Treasury Management module. The questions cover topics like reserve requirements, integrated treasury operations, functions of treasury, globalization, exchange rates, nostro accounts, monetary aggregates, liquidity management tools of RBI, payment systems, risk management practices, derivatives, asset-liability management, and credit risk mitigation techniques. The answers to the multiple choice questions are also provided at the end of each unit's questions.
This document outlines a framework for evaluating bank performance both internally and externally. It discusses evaluating internal performance based on planning, technology, and personnel. External performance is evaluated based on market share, regulatory compliance, and public confidence. Key financial ratios are presented to analyze profitability, risk, efficiency, liquidity, and economic profit measures like RAROC and EVA. Balance sheets and income statements are also summarized. The document provides a comprehensive overview of how to assess various aspects of a bank's performance.
This document appears to be a quiz covering various topics related to foreign exchange and risk management. It includes multiple choice questions and fill in the blank exercises testing understanding of key terms. Some of the topics covered include foreign exchange markets, exchange rates, derivatives, types of risk like settlement risk, and risk management strategies. The document provides answers to the questions and exercises for users to check their progress in learning the material.
Mortgage-backed securities (MBS) are created when mortgages are pooled together and sold as securities. There are two main types of MBS: mortgage pass-through securities, where payments are passed through to investors, and mortgage-backed derivatives like CMOs that create multiple classes of securities. Government agencies like Fannie Mae and Freddie Mac purchase mortgages from lenders and pool them to issue MBS to expand the secondary mortgage market. Yields on MBS can be calculated in different ways, such as monthly cash flow yield based on interest and principal payments, or bond equivalent yield which compares the yield to a bond of similar maturity.
Basel iii a comprehensive regulatory response february 2011Maan Barazi
dr Amine Awad in the UAB conference - february 2011 presents views on Reasons behind the International Financial Crisis
Major Components of Basel III
Lebanon’s Action Plan to fully implement Basel III
We measure how securitized assets, including mortgage-backed securities and other asset-backed securities, have shifted across financial institutions over this crisis and how the availability of financing has accommodated such shifts. Sectors dependent on repo financing – in particular, the hedge fund and broker-dealer sector – have reduced asset holdings, while the commercial banking sector, which has had access to more stable funding sources, has increased asset holdings. These findings are important to understand the role played by the government during the crisis as well as to understand the factors determining asset prices and liquidity during the crisis.
Zhiguo He (University of Chicago), In Gu Khang (Northwestern University) and Arvind Krishnamurthy (Northwestern University and NBER)
TARGET-2 Securities Platform: Implications for the Post-Trade ArenaCognizant
T2S is an important step in fixing Europe’s frag¬mented settlement system and could provide much-needed financial stabil¬ity by reducing the risks and costs associated with cross-border transactions.
This document discusses approaches to managing risks in sovereign debt restructuring. It proposes using risk management tools ex post to optimize debt restructuring and restore sustainability, as well as implementing sovereign contingent debt (S-CoCo) instruments ex ante to address risks proactively. S-CoCo bonds would trigger a payment standstill and IMF assistance if crisis indicators exceed thresholds. The document also presents a Greece case study analyzing the potential impact of risk management and S-CoCo on its debt situation. Key challenges to S-CoCo adoption are ensuring a solid investor base and coordination with IMF/ESM programs.
Cidse paper on financial regulation nov 2012 final copiaManfredNolte
This document provides an overview of CIDSE's role in advocating for international financial regulation based on Catholic Social Teaching. It discusses four principles that should guide financial sector regulation: 1) ensuring the financial sector supports a real economy focused on human well-being and sustainable development, 2) preventing financial crises and mitigating their impacts, 3) promoting a just distribution of wealth and income, and 4) ensuring regulatory processes are transparent and accountable. The document then examines specific issues in financial regulation, including too big to fail institutions, bank capital requirements, derivatives, hedge funds, credit rating agencies, financial sector taxation, and shadow banking. It provides CIDSE's perspective on these issues and concludes with recommendations.
Analysis of recovery determinants of defaulted mortgages in nigerian lending ...Alexander Decker
This document summarizes a research paper that analyzed the determinants of recovery of defaulted mortgage loans in the Nigerian lending industry. The study used logistic regression analysis on data from 3,197 defaulted mortgages from 1999-2011 at commercial banks and primary mortgage institutions in Nigeria. The results showed that GDP growth, borrower status, borrower default history, year as a borrower, bank relationship, loan supervision, collateral age, and collateral location were positively associated with loan recovery rates. Meanwhile, inflation growth, interest rates, collateral priority, and collateral revaluation were negatively associated with recovery rates. Other factors like loan-to-value ratio, loan size, and loan duration had insignificant but positive effects on recovery possibility.
The Basel Committee proposes strengthening global capital and liquidity regulations to promote a more resilient banking sector and reduce risks of spillover from the financial sector to the real economy. Key proposals include raising capital requirements, enhancing risk coverage, introducing a leverage ratio, and addressing procyclicality and systemic risk. The proposals aim to improve the banking sector's ability to absorb shocks from financial stress by increasing quality and consistency of capital, supplementing risk-based requirements with a leverage ratio, and implementing countercyclical buffers and capital conservation measures.
Understanding Risk Management and Compliance, May 2012Compliance LLC
The document discusses several topics related to banking regulation:
1) It discusses the EBA's work over the past year to strengthen bank capital positions in response to the financial crisis, including stress tests and recommendations to raise over €115 billion in capital.
2) It outlines the EBA's goal of establishing a Single Rulebook to harmonize banking rules across the EU and prevent a relaxation of standards.
3) It focuses on the EBA's work developing regulatory technical standards for defining bank capital and ensuring high quality capital instruments are used across all member states.
Basel III - Implications of ImplementationDavid Kyson
This report has been commissioned to give an investigative insight into the implementation of Basel III; the implications of implementing, previous accords and also the impact this has on various systems and activities. It will explore the previous shortcomings of the accords, aswel as the new requirements. There will be a brief description on each topic as well as a sound, but critical analysis of the impact upon each of these, caused by Basel III. Topics include: Basel III, previous accords, Global Bank Lending and the Bank System.
It incorporates a variety of information sources to gain a broader understanding of viewpoints and effects, but will focus largely on Bank Behaviour in Response to Basel III: A Cross-Country Analysis by Thomas F. Cosimano and Dalia S. Hakura (2011).
Presentation the holdout creditor problem lessons from restructuring sovereig...Sebastian Grund
Presentation of my research on the holdout creditor problem (i.e. a situation where a minority of creditors blocks a sovereign debt restructuring deal) in the case of Argentina and Greece
This document provides supplemental investment information for Allstate's financial results for Q4 2008. It discusses Allstate's actions to mitigate investment risks and optimize returns, including reducing exposures to financial and real estate sectors. It also analyzes realized capital gains and losses, including $1.93B in net losses from impairments, changes in intent, derivatives, and limited partnerships. Finally, it provides details on problem investments, collateralized securities, and accounting classifications.
This document provides an overview of money, banking, and monetary policy. It discusses the barter system and its drawbacks, then defines the primary functions of money as a medium of exchange and measure of value. It also describes different types of money like credit money and different forms of deposits held at commercial banks. The document outlines the roles and functions of commercial banks and the central bank, and explains some monetary policy tools used by central banks like bank rate, open market operations, reserve ratios, and moral suasion.
Delhi Design Studio is a group of branding and marketing experts with big thinking and innovative strategies as our driving force. We closely work with various start ups to create fresh, new concepts, iconoclastic branding design, and innovative marketing strategies that challenge convention. We push the envelope. We think big and deliver even bigger.
Top Tips and Tricks For Supporting Your Oracle Health Science Application UsersPerficient
1. Steven provides 5 tips for supporting Oracle Health Science Application users: using a Windows-based FTP program, adding a spellchecker for remote desktop connections, creating a single table with all audit information, allowing multiple logos for DCF reports, and changing report defaults from printer to file.
2. He discusses each tip in detail, providing screenshots and explanations.
3. Steven acknowledges colleagues at BioPharm Systems for their contributions to supporting users.
Check your progress module c treasury managementVinayak Kamath
This document contains multiple choice questions from various units of a Treasury Management module. The questions cover topics like reserve requirements, integrated treasury operations, functions of treasury, globalization, exchange rates, nostro accounts, monetary aggregates, liquidity management tools of RBI, payment systems, risk management practices, derivatives, asset-liability management, and credit risk mitigation techniques. The answers to the multiple choice questions are also provided at the end of each unit's questions.
This document outlines a framework for evaluating bank performance both internally and externally. It discusses evaluating internal performance based on planning, technology, and personnel. External performance is evaluated based on market share, regulatory compliance, and public confidence. Key financial ratios are presented to analyze profitability, risk, efficiency, liquidity, and economic profit measures like RAROC and EVA. Balance sheets and income statements are also summarized. The document provides a comprehensive overview of how to assess various aspects of a bank's performance.
This document appears to be a quiz covering various topics related to foreign exchange and risk management. It includes multiple choice questions and fill in the blank exercises testing understanding of key terms. Some of the topics covered include foreign exchange markets, exchange rates, derivatives, types of risk like settlement risk, and risk management strategies. The document provides answers to the questions and exercises for users to check their progress in learning the material.
Mortgage-backed securities (MBS) are created when mortgages are pooled together and sold as securities. There are two main types of MBS: mortgage pass-through securities, where payments are passed through to investors, and mortgage-backed derivatives like CMOs that create multiple classes of securities. Government agencies like Fannie Mae and Freddie Mac purchase mortgages from lenders and pool them to issue MBS to expand the secondary mortgage market. Yields on MBS can be calculated in different ways, such as monthly cash flow yield based on interest and principal payments, or bond equivalent yield which compares the yield to a bond of similar maturity.
Basel iii a comprehensive regulatory response february 2011Maan Barazi
dr Amine Awad in the UAB conference - february 2011 presents views on Reasons behind the International Financial Crisis
Major Components of Basel III
Lebanon’s Action Plan to fully implement Basel III
We measure how securitized assets, including mortgage-backed securities and other asset-backed securities, have shifted across financial institutions over this crisis and how the availability of financing has accommodated such shifts. Sectors dependent on repo financing – in particular, the hedge fund and broker-dealer sector – have reduced asset holdings, while the commercial banking sector, which has had access to more stable funding sources, has increased asset holdings. These findings are important to understand the role played by the government during the crisis as well as to understand the factors determining asset prices and liquidity during the crisis.
Zhiguo He (University of Chicago), In Gu Khang (Northwestern University) and Arvind Krishnamurthy (Northwestern University and NBER)
TARGET-2 Securities Platform: Implications for the Post-Trade ArenaCognizant
T2S is an important step in fixing Europe’s frag¬mented settlement system and could provide much-needed financial stabil¬ity by reducing the risks and costs associated with cross-border transactions.
This document discusses approaches to managing risks in sovereign debt restructuring. It proposes using risk management tools ex post to optimize debt restructuring and restore sustainability, as well as implementing sovereign contingent debt (S-CoCo) instruments ex ante to address risks proactively. S-CoCo bonds would trigger a payment standstill and IMF assistance if crisis indicators exceed thresholds. The document also presents a Greece case study analyzing the potential impact of risk management and S-CoCo on its debt situation. Key challenges to S-CoCo adoption are ensuring a solid investor base and coordination with IMF/ESM programs.
Cidse paper on financial regulation nov 2012 final copiaManfredNolte
This document provides an overview of CIDSE's role in advocating for international financial regulation based on Catholic Social Teaching. It discusses four principles that should guide financial sector regulation: 1) ensuring the financial sector supports a real economy focused on human well-being and sustainable development, 2) preventing financial crises and mitigating their impacts, 3) promoting a just distribution of wealth and income, and 4) ensuring regulatory processes are transparent and accountable. The document then examines specific issues in financial regulation, including too big to fail institutions, bank capital requirements, derivatives, hedge funds, credit rating agencies, financial sector taxation, and shadow banking. It provides CIDSE's perspective on these issues and concludes with recommendations.
Analysis of recovery determinants of defaulted mortgages in nigerian lending ...Alexander Decker
This document summarizes a research paper that analyzed the determinants of recovery of defaulted mortgage loans in the Nigerian lending industry. The study used logistic regression analysis on data from 3,197 defaulted mortgages from 1999-2011 at commercial banks and primary mortgage institutions in Nigeria. The results showed that GDP growth, borrower status, borrower default history, year as a borrower, bank relationship, loan supervision, collateral age, and collateral location were positively associated with loan recovery rates. Meanwhile, inflation growth, interest rates, collateral priority, and collateral revaluation were negatively associated with recovery rates. Other factors like loan-to-value ratio, loan size, and loan duration had insignificant but positive effects on recovery possibility.
The Basel Committee proposes strengthening global capital and liquidity regulations to promote a more resilient banking sector and reduce risks of spillover from the financial sector to the real economy. Key proposals include raising capital requirements, enhancing risk coverage, introducing a leverage ratio, and addressing procyclicality and systemic risk. The proposals aim to improve the banking sector's ability to absorb shocks from financial stress by increasing quality and consistency of capital, supplementing risk-based requirements with a leverage ratio, and implementing countercyclical buffers and capital conservation measures.
Understanding Risk Management and Compliance, May 2012Compliance LLC
The document discusses several topics related to banking regulation:
1) It discusses the EBA's work over the past year to strengthen bank capital positions in response to the financial crisis, including stress tests and recommendations to raise over €115 billion in capital.
2) It outlines the EBA's goal of establishing a Single Rulebook to harmonize banking rules across the EU and prevent a relaxation of standards.
3) It focuses on the EBA's work developing regulatory technical standards for defining bank capital and ensuring high quality capital instruments are used across all member states.
Basel III - Implications of ImplementationDavid Kyson
This report has been commissioned to give an investigative insight into the implementation of Basel III; the implications of implementing, previous accords and also the impact this has on various systems and activities. It will explore the previous shortcomings of the accords, aswel as the new requirements. There will be a brief description on each topic as well as a sound, but critical analysis of the impact upon each of these, caused by Basel III. Topics include: Basel III, previous accords, Global Bank Lending and the Bank System.
It incorporates a variety of information sources to gain a broader understanding of viewpoints and effects, but will focus largely on Bank Behaviour in Response to Basel III: A Cross-Country Analysis by Thomas F. Cosimano and Dalia S. Hakura (2011).
Presentation the holdout creditor problem lessons from restructuring sovereig...Sebastian Grund
Presentation of my research on the holdout creditor problem (i.e. a situation where a minority of creditors blocks a sovereign debt restructuring deal) in the case of Argentina and Greece
This document provides supplemental investment information for Allstate's financial results for Q4 2008. It discusses Allstate's actions to mitigate investment risks and optimize returns, including reducing exposures to financial and real estate sectors. It also analyzes realized capital gains and losses, including $1.93B in net losses from impairments, changes in intent, derivatives, and limited partnerships. Finally, it provides details on problem investments, collateralized securities, and accounting classifications.
This document provides an overview of money, banking, and monetary policy. It discusses the barter system and its drawbacks, then defines the primary functions of money as a medium of exchange and measure of value. It also describes different types of money like credit money and different forms of deposits held at commercial banks. The document outlines the roles and functions of commercial banks and the central bank, and explains some monetary policy tools used by central banks like bank rate, open market operations, reserve ratios, and moral suasion.
Delhi Design Studio is a group of branding and marketing experts with big thinking and innovative strategies as our driving force. We closely work with various start ups to create fresh, new concepts, iconoclastic branding design, and innovative marketing strategies that challenge convention. We push the envelope. We think big and deliver even bigger.
Top Tips and Tricks For Supporting Your Oracle Health Science Application UsersPerficient
1. Steven provides 5 tips for supporting Oracle Health Science Application users: using a Windows-based FTP program, adding a spellchecker for remote desktop connections, creating a single table with all audit information, allowing multiple logos for DCF reports, and changing report defaults from printer to file.
2. He discusses each tip in detail, providing screenshots and explanations.
3. Steven acknowledges colleagues at BioPharm Systems for their contributions to supporting users.
Rick Smith is an experienced mobile maintenance management professional with over 30 years of experience in the mining and mobile plant sectors in Western Australia. He is currently a Mobile Maintenance Supervisor for Downer EDI Mining at the Christmas Creek Mine site, where he leads a team of 40 personnel and oversees the maintenance of various heavy equipment. Prior to this role, he held similar supervisory roles at other mining companies. He has extensive qualifications and training in areas such as fuel injection fitting, health and safety, and mobile equipment maintenance.
Pandemonium Fights is an MMA and boxing promotion company that has promoted 12 successful fights in Southern California since 2009. They have held fights at the Riverside Convention Center with over 1,200 attendees. Pandemonium is seeking sponsors for their upcoming title fights in February, July, September, and December 2011. Sponsorship packages include branding in promotions, on fight materials, and broadcast rights. Packages start at $55,000 for a title sponsorship and include additional branding benefits across Pandemonium's events and broadcasts.
Este documento presenta los objetivos y contenidos de una unidad sobre sistemas tecnológicos. La unidad busca que los estudiantes comprendan los productos creados por el hombre, sus características y evolución. También pretende desarrollar actitudes éticas y responsables sobre el uso de la tecnología. Los contenidos incluyen conceptos sobre sistemas en general y sistemas para la transformación y control de materiales, con énfasis en visitas y trabajos prácticos para reconocer sistemas del entorno.
This presentation discusses the concept of home automation or "domotics". It explains that domotics refers to integrating technology and devices to remotely control and automate functions in the home. This allows users to control lights, appliances, security systems and more through a centralized system, smartphone or other device. The goal of domotics is to make the home more convenient, efficient and secure through automated control and monitoring of household functions.
Este documento presenta las calificaciones de 26 estudiantes de 6to grado en la asignatura de Computación para el segundo bimestre. Incluye las calificaciones de cada estudiante en las secciones de asistencia, comportamiento, tareas, cuestionario y examen, así como su nota total. Al final, la profesora deja algunas observaciones sobre el proceso de calificación y la fecha límite para entregar trabajos atrasados.
Study Setup with the New OC and RDC 4.6 FeaturesPerficient
This document provides a 3 sentence summary of the key points from the document:
The document outlines new features in Oracle Clinical 4.6 including enhanced page access controls, conditional branching in online data entry, flexible study design features like data-triggered rules and interval rules, and copying pages between case report forms. It describes how these features are configured and how they impact the user experience in online data entry. Examples are provided to illustrate how the new functionality works.
The document describes www.YouDigg.me, a customizable white label solution for building new media networks for businesses. It offers high-traffic compatibility, media sharing tools, online TV and radio stations, event and group organization, targeted advertising and marketing opportunities, and the ability to generate revenue and agents without costs.
KNR constructions a case study of patience and multibagger returnsNiteen S Dharmawat
The answer to the quiz of 17th Jan is KNR Constructions. I received several responses. Many of you answered it correctly, some of you got confused it with J Kumar Infra (JKIL) and REC Ltd. But that’s ok. Many of you tried to find out the name of the company by matching the parameters. This process of learning was more important.
Using Lag Variables in Oracle Clinical ProceduresPerficient
The document discusses using lag variables in Oracle Clinical procedures. It provides an example of using lags to check that episodes of nausea are recorded between assessments of nausea. The example models the assessment and episode forms, writes a validation procedure using lags, and explains how to structure the procedure and compare dates/times in Oracle Clinical. The presenter has over 15 years of experience implementing Oracle Clinical.
Business and Higher Education Collaborating to Create Actionable Intelligence...Steven Miller
The document discusses the Business-Higher Education Forum (BHEF), a membership organization that forms strategic partnerships between business and higher education leaders. BHEF works to create diverse and skilled talent through innovative undergraduate programs aligned with industry demand. Specifically, BHEF helps members assess workforce needs, identify curriculum gaps, and co-design data science and analytics programs to equip students with in-demand skills and ensure their post-graduation success. BHEF also serves as a thought leader and hub for collaborations in emerging fields like data science and analytics through initiatives such as competency mapping and regional task forces.
This document provides an overview of IBM Watson and cognitive technologies. It discusses how Watson can understand natural language and vision, and how it uses machine learning techniques like deep learning. Various real-world applications of Watson are presented, such as expert advisors, personal assistants, and data insights. The document also discusses the current and future state of artificial intelligence, including artificial narrow intelligence, artificial general intelligence, and artificial superintelligence. Finally, it emphasizes the importance of continuous learning and growth for IBM.
Pertumbuhan ekonomi adalah proses dimana terjadi kenaikan produk nasional bruto riil atau pendapatan nasional riil. Jadi perekonomian dikatakan tumbuh atau berkembang bila terjadi pertumbuhan output riil. Definisi pertumbuhan ekonomi yang lain adalah bahwa pertumbuhan ekonomi terjadi bila ada kenaikan output perkapita. Pertumbuhan ekonomi menggambarkan kenaikan taraf hidup diukur dengan output riil per orang.
This document discusses hybrid debt instruments issued by corporations and financial institutions. It defines hybrid securities and contingent capital notes, and explores the main design features and trade-offs involved. Recent hybrid debt issuances are examined, along with the rationale for why companies and banks issue such instruments. Credit rating agencies' approach to evaluating hybrids and contingent capital notes is also reviewed.
This document discusses hybrid securities and contingent capital notes. It begins by defining hybrid securities and contingent capital notes, then discusses their key design features. It analyzes why corporations and financial institutions issue hybrid securities, how rating agencies evaluate them, and considerations for investors. Recent hybrid issuances are also examined. In conclusion, while hybrid securities provide benefits to issuers, investors need to carefully assess the risks, particularly regarding how they are treated in default scenarios and how interest payments are structured.
This document summarizes a student paper that analyzes the causes of adverse performance in collateralized debt obligations (CDOs) backed by asset-backed securities (ABS CDOs). Using data from 735 ABS CDOs, the paper finds: 1) CDOs with exposure to subprime and Alt-A mortgages from 2006-2007 significantly underperformed, 2) The identity of the CDO underwriter was a predictor of performance, with some banks having higher quality underwriting, 3) Original credit ratings assigned to CDOs failed to capture the true risks and were inflated. Overall, the collapse of the CDO market was caused by poorly constructed CDOs, irresponsible underwriting, and flawed
Attheir creation, the rating agencies were like the news agencies because they published newsletters and were paying by contributions subscribers. That method of remuneration then evolved, and these are the debtors who have paid the agencies. Meanwhile, rating methods have gradually evolved to take into account the use of increasingly important to companies called sophisticated financial products such as structured products. Although the method of compensation has evolved, the activity of agencies has not changed and their responsibilities have remained for a long timethose news agencies, that is to say protected by freedom of expression. Thus, for years, they have enjoyed a special status allowing them to express opinions without any legal constraint weighs on them. Indeed, unlike, for example, an auditor who certified the accounts and give "reasonable assurance" of their quality based on professional standards of practice; no methodology stress weighs on agencies. However, their responsibilities have been initiated for the first time in the history of the rating, after the crisiss structured products. We see in this article how the agencies evaluate the risk of industrial and commercial companies (corporate) and financial institutions, as well as before ages and limitations of the current methodology used by credit rating agencies.
This document is a working paper that discusses the theory of financial intermediation and implications for structured finance markets. It reviews literature on security design and securitization to identify economic forces underlying structured finance instruments.
The paper finds that asymmetric information problems between an originator and investors can lead to pooling of assets and tranching of liabilities. This is done to address adverse selection issues. Structured finance also helps complete incomplete financial markets and may arise due to market segmentation opportunities. Tranching "slices" the loss distribution of underlying assets, creating securities with differing risk and return profiles.
This document is a working paper that discusses the theory of financial intermediation and implications for structured finance markets. It reviews literature on security design and securitization to identify economic forces underlying structured finance instruments.
The paper finds that asymmetric information problems between an originator and investors can lead to pooling of assets and tranching of liabilities. This is done to address adverse selection issues. Structured finance also helps complete incomplete financial markets and may arise due to market segmentation opportunities. Tranching "slices" the loss distribution of underlying assets, creating securities with differing risk and return profiles for investors.
This document is a working paper that discusses the theory of financial intermediation and implications for structured finance markets. It reviews literature on security design and securitization to identify economic forces underlying structured finance instruments.
The paper finds that asymmetric information problems between an originator and investors can lead to pooling of assets and tranching of liabilities. This is done to address adverse selection issues. Structured finance also helps complete incomplete financial markets and may arise due to market segmentation opportunities. Tranching "slices" the loss distribution of underlying assets, creating securities with differing risk and return profiles.
IOSR Journal of Business and Management (IOSR-JBM) is an open access international journal that provides rapid publication (within a month) of articles in all areas of business and managemant and its applications. The journal welcomes publications of high quality papers on theoretical developments and practical applications inbusiness and management. Original research papers, state-of-the-art reviews, and high quality technical notes are invited for publications.
This document discusses techniques for structuring securitization deals to breach the sovereign ceiling. It begins by explaining the rating approach and theory of the sovereign ceiling. Traditional rating approaches viewed the sovereign rating as a cap on private issuer ratings from that country. However, some techniques allow deals to achieve ratings above the sovereign rating. The document then details various structuring techniques used to bypass exchange controls and country risks, including future flows, supply bonds, currency swaps, and guarantees. It also discusses techniques to outlast exchange control periods or provide exemption from controls. Securitization deals in dollarised economies with structural currency links can also potentially achieve above sovereign ratings. Overall, the document examines how investment bankers design securitization deals using various legal and financial
The document outlines the major duties and functions of central banks, including conducting monetary policy, supervising financial institutions, and maintaining financial stability. It describes the tools that central banks use to implement monetary policy, such as open market operations, reserve requirements, and the discount rate. The goals of monetary policy are also discussed, including price stability, economic growth, and maintaining stable interest and exchange rates.
The document discusses CDO rating methodologies used by rating agencies. It compares two main approaches: [1] Moody's binomial expansion technique (BET) which uses a diversity score to simplify a portfolio, and [2] Monte Carlo simulation which models random defaults. The BET is faster but less accurate while Monte Carlo simulation provides more accurate loss distributions but takes longer to run. The document explores how differences in methodology, such as correlation assumptions, can impact ratings of senior CDO tranches and discusses potential model risk for investors.
The document discusses concepts related to measuring money supply and determining money supply. It defines several monetary aggregates (M1-M4, NM0-NM3, L1-L3) used in India to measure money supply. It then presents a general model of money creation where money supply is determined by the monetary base, currency to deposit ratio, required reserve ratio, and excess reserve ratio. Changes in these determinants by the central bank, commercial banks, or public can impact money supply. The document also discusses exogenous and endogenous views of how the money supply curve may be shaped.
This document summarizes the key events that led to the subprime mortgage crisis and current financial crisis. It describes how subprime mortgages were originated and then securitized into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). These securities became highly complex and opaque. When the housing market declined, many subprime borrowers defaulted, causing the value of MBS and CDOs to plummet. This impaired the balance sheets of financial institutions and froze credit markets. The document outlines various experts' proposals to remedy the crisis, including government purchases of toxic assets, capital injections into banks, and establishing funds to remove bad assets from banks and resolve insolvent institutions.
Basel 3 is an update to the Basel Accords that aims to strengthen bank capital requirements and introduce new regulatory requirements on bank liquidity and leverage. Key changes include tighter definitions of Tier 1 capital, a leverage ratio, countercyclical capital buffers, and new liquidity standards. The goals are to promote a more resilient banking system and reduce risk of financial crises. Basel 3 also seeks to address procyclicality concerns by promoting capital conservation and countercyclical buffers.
This document provides an overview of credit risk in banking. It defines credit risk as the risk of losses from a counterparty failing to meet obligations. Credit risk makes up 50-70% of banking risks. The document outlines various debt instruments like loans and bonds that expose banks to credit risk. It discusses macro assessments of credit risk through metrics like non-performing loans and credit growth at the country level. It also covers micro assessments using tools like credit registers, ratings, scoring models and other quantitative credit risk models.
This document discusses pricing models for collateralized debt obligations (CDOs), which are financial instruments backed by pools of assets such as loans, bonds, and mortgages. It focuses on implementing the Gaussian and Student's t copula models to value CDO tranches using Monte Carlo simulation. The Gaussian copula cannot account for joint extreme events, while the Student's t copula can model heavier tails by varying its degrees of freedom parameter. The document generates pricing surfaces for different CDO tranches under each copula to analyze their effects and suitability for modeling CDOs under different economic conditions.
Restarting asset backed securities and current developments in the securitiza...Alexander Decker
This document summarizes a research paper on restarting asset-backed securities (ABS) in Europe after the 2007-2008 financial crisis. It discusses how securitization contributed to the crisis but can also help address economic crises and distressed companies' needs for capital. The paper examines how regulatory reforms are reshaping ABS business, using data on developments in Europe. Hypotheses are tested on the crisis's impact through statistical analysis. Results show the crisis had a minimal effect, and ABS is now mainly shaped by new regulations.
Restarting asset backed securities and current developments in the securitiza...Alexander Decker
This document summarizes a research paper on restarting asset-backed securities (ABS) in Europe after the 2007-2008 financial crisis. It discusses how securitization contributed to the crisis but can also help address economic crises and distressed companies' needs for capital. The paper examines how regulatory reforms are reshaping ABS business. It analyzes data on recent ABS activity in Europe to test the hypothesis that the crisis had a minimal impact on reshaping the ABS market. The results show that regulatory changes, not the crisis itself, have mainly driven changes to the ABS market post-crisis.
Final term paper emerging market finance (1)Lehana Singh
This document summarizes research on using charity funds to securitize microfinance receivables. It is divided into four parts: 1) current structured microfinance products, 2) charity funds, 3) regulations, and 4) partners. Examples of past microfinance securitizations are provided from India and Bangladesh. While regulatory hurdles exist, the research finds charities could expand microfinance by providing credit enhancement or purchasing securitized receivables.
1. Office of the Superintendent
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CDO Modelling
Anthony Vaz
Robert Kowara
Carol Cheng
Capital Markets Division
OSFI
The views expressed in this presentation are
solely those of the authors.
2. Office of the Superintendent
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Outline
1. CDO Terminology
2. CDO Valuation
2.1 Moody’s Binomial Expansion Method (BET)
• Modelling Default and Correlation
• Excel Implementation
2.2 Duffie-Garleanu Methodology
• Modelling Default and Correlation
• Excel Implementation
3. Calculating VaR for CDO Tranches
4. Concluding Remarks
3. Office of the Superintendent
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1. CDO Terminology
1.1 Definitions
A CDO is a Collaterized Debt Obligation. A pool of
securities is used as collateral to fund a prioritized
sequence of payments. This payment sequence is
illustrated as the following “water flow” of cash
payments.
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SENIOR
TRANCHE
MEZZANINE
TRANCHE
EQUITY
TRANCHE
1. CDO Terminology
1.1 Definitions
Cash Flow Water Fall
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1. CDO Terminology
1.2 CDO Types
CDO can be classified in a variety of ways.
1.2.1 Assets in Collateral Pool
CDO’s with a collateral pool of bonds are termed Collateralized Bond
Obligations (CBOs).
CDO’s with a collateral pool of loans are termed Collateralized Loan Obligations
(CLOs).
6. Office of the Superintendent
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June 11, 2003 - Risk Conference, Boston, MA Page 6
1. CDO Terminology
1.2 CDO Types
CDO can be classified in a variety of ways.
1.2.2 Transaction Type
In an arbitrage transaction, the CDO is constructed to capture the difference in
spread between the collateral pool and the yields at which the senior liabilities of
the CDO are issued.
In a balance sheet transaction, the CDO is constructed to remove loans or
bonds from the balance sheet of a financial institution. This is motivated by the
desire to obtain capital relief, improve liquidity, and re-deploy to alternative
investments.
7. Office of the Superintendent
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1. CDO Terminology
1.2 CDO Types
CDO can be classified in a variety of ways.
1.2.3 Covenants & Management of Collateral Pool
1.2.3.1 Market Value CDO
• A market value CDO has a diversified collateral pool of financial assets in
multiple asset categories that may include corporate bonds, loans, private and
public equity, distressed securities or emerging market investments, and cash
and money market instruments.
• The collateral pool is actively managed.
• The collateral pool is priced periodically to obtain the market value. The
payments to the tranches are based on threshold levels for the market value of
the collateral pool.
8. Office of the Superintendent
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June 11, 2003 - Risk Conference, Boston, MA Page 8
1. CDO Terminology
1.2 CDO Types
CDO can be classified in a variety of ways.
1.2.3 Covenants & Management of Collateral Pool
1.2.3.2 Cash Flow CDO
• A cash flow CDO has a collateral pool of financial assets in a specific asset
category, such as corporate bonds, loans, or mortgages.
• The collateral pool is fairly static. When an asset matures or defaults, the
proceeds may be invested at the discretion of the fund manager.
• The collateral pool is priced periodically to obtain the par value. The payments to
the tranches are based on threshold levels for the par value of the collateral
pool.
9. Office of the Superintendent
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June 11, 2003 - Risk Conference, Boston, MA Page 9
1. CDO Terminology
1.2 CDO Types
CDO can be classified in a variety of ways.
1.2.4 Legal Ownership of Collateral Pool Assets
1.2.4.1 Non-synthetic CDO
A non-synthetic CDO has legal ownership of all the assets in the collateral pool.
The CDO only assumes economic risk on the assets which it legally owns.
1.2.4.2 Synthetic CDO
A synthetic CDO does not have legal ownership of the assets in the collateral
pool. The CDO assumes economic risk on the assets which it does not legally
own.
10. Office of the Superintendent
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June 11, 2003 - Risk Conference, Boston, MA Page 10
2. CDO Valuation
A CDO is modelled in two parts: a defaultable collateral pool and a
contingent payment stream to the CDO tranches.
We shall discuss two popular techniques for valuation of CDOs:
Moody’s Binomial Expansion Technique [1],
Duffie-Singleton approach to correlated default applied to a
contingent payment stream [2][3].
The copula method is also popular, but will not be discussed here.
[1] A. Cifuentes and G. O’Connor, “The Binomial Expansion Method Applied to CBO/CLO Analysis”, Moody’d
Special Report, December 13, 1996.
[2] D.Duffie and N. Garleanu, “Risk and Valuation of Collaterized Debt Obligations”, Stanford University,
working paper, 2001.
[3] D.Duffie and K. Singleton, “Simulating Correlated Defaults”, Stanford University, working paper, 1998.
11. Office of the Superintendent
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2.1 Binomial Expansion Technique
2.1.1 Derivation of Diversity Score
Pool of Correlated Bonds
Correlated bonds: M=20
Diversity Score: N=5
12. Office of the Superintendent
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2.1 Binomial Expansion Technique
2.1.1 Derivation of Diversity Score
2.1.1.1 Independent Bond Pool
• Consider a hypothetical pool consisting of N bonds having the
same par value F. The bond defaults are assumed to be
independent.
• N is called the diversity score of the bond pool.
• All the bonds are assumed to have the same loss L when a
default occurs.
• Let the be a random variable representing the state of bond i.iX
defaultednotbond,0
defaultedbond,1
i
i
Xi
pXi ]1[Prob pXi 1]0[Prob
13. Office of the Superintendent
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2.1 Binomial Expansion Technique
We can solve for the first and second moment loss statistics of the
collateral portfolio.
pXi ][EHence pXi ][E 2
)1(][][][Variance 22
ppXEXEX iii
N
i
iPort XLL
1
pNLLE Port ][ ))1(1(][ 22
pNpNLLE Port
14. Office of the Superintendent
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2.1 Binomial Expansion Technique
2.1.1.2 Dependent Bond Pool
•Consider a hypothetical pool consisting of M bonds having the
same par value . The bond defaults are assumed to be
dependent.
•All the bonds are assumed to have the same loss when a
default occurs.
•Let the be a random variable representing the state of bond i.
F
iY
defaultednotbond,0
defaultedbond,1
i
i
Yi
pYi ]1[Prob pYi 1]0[Prob
L
15. Office of the Superintendent
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2.1 Binomial Expansion Technique
pYi ][E pYi ][E 2
)1(][][][Variance 22
ppYEYEY iii
Let )1(i pp
jiijji YY ][Covariance
2
][E pYY jiijji
Assume all pair-wise correlations are equal:
Assume all variances are equal:
ij
ij
16. Office of the Superintendent
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June 11, 2003 - Risk Conference, Boston, MA Page 16
2.1 Binomial Expansion Technique
We can solve for the first and second moment loss statistics of the
collateral portfolio.
M
i
iPort YLL
1
LMpLE Port ][
))1(()1(][ 2222
pppLMMLMpLE Port
17. Office of the Superintendent
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2.1 Binomial Expansion Technique
Equate expressions for the first and second moment loss statistics of
the collateral portfolios to obtain the following.
)1(
MN
NM
Correlation:
where N=diversity score & M=number of correlated bonds
)1(1
M
M
N
Note, these formulae can be generalized to account for random recovery rates using the same
technique.
18. Office of the Superintendent
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2.1 Binomial Expansion Technique
2.1.2 Computing CDO Loss Scenarios
The BET method makes the assumption that losses occur with a given
profile.
For example,
50% end of year 1
10% end of year 2
10% end of year 3
10% end of year 4
10% end of year 5
The profiles are determined from historical data; but they cannot be rigorously tailored to a
particular portfolio.
19. Office of the Superintendent
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2.1 Binomial Expansion Technique
The probability of getting j defaults in the bond pool is
jNj
j pp
jNj
N
P
)1(
)!(!
!
2.1.2 Computing CDO Loss Scenarios
A loss scenario Sj is associated with each of the above default
combinations.
Hence S10 corresponds to 5 defaults in the first year, 1 at end of year 2, 1 at
end of year 3, 1 end of year 4, and 1 at end of year 5.
The CDO cashflows are computed accordingly.
20. Office of the Superintendent
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2.1.3 Excel VBA Implementation of BET Method Applied to CBO/CLO
DEFAULT SCENARIO POOL OF ASSETS
time defaults Diversity Score 58
0.5 0.00 Average Coupon 8.00%
1.0 0.50 Average Maturity 10
1.5 0.00 Notional 1000
2.0 0.10 Recovery Rate 50.00%
2.5 0.00 Reinvestment Rate 6.00%
3.0 0.05 Average Prob of Def 32.00%
3.5 0.00
4.0 0.05 TRANCHES
4.5 0.00 TR1 TR2 TR3 TR4 TR5 TR6 TR7 TR8
5.0 0.05 Name aaa bbb ccc
5.5 0.00 Coupon 6.50% 10.00% 30.00%
6.0 0.05 Notional 500 280 220
6.5 0.00 Maturity 10 10 10
7.0 0.05 OC Test 0 0 0
7.5 0.00 Expected loss 0.0019% 14.3932% 57.8585% #N/A #N/A #N/A #N/A #N/A
8.0 0.05 Ratings Aaa B2 NR #N/A #N/A #N/A #N/A #N/A
8.5 0.00
9.0 0.05
9.5 0.00
10.0 0.05
10.5
11.0
11.5
Calculate
22. Office of the Superintendent
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Binomial Distribution
2.1.3 Excel VBA Implementation of BET Method Applied to CBO/CLO
Probability distribution
0
0.02
0.04
0.06
0.08
0.1
0.12
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
Prob
23. Office of the Superintendent
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2.1.3 Excel VBA Implementation of BET Method Applied to CBO/CLO
Expected Loss versus Diversty
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
5
12
16
20
24
28
32
36
40
44
48
52
56
60
TR1
TR2
TR3
TR4
TR5
TR6
TR7
TR8
Expected Loss versus Diversity
24. Office of the Superintendent
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2.1.3 Excel VBA Implementation of BET Method Applied to CBO/CLO
Expected Loss versus Diversity
Senior Tranche Expected Loss Versus Diversity
0
0.005
0.01
0.015
0.02
0.025
0.03
5
12
16
20
24
28
32
36
40
44
48
52
56
60
TR1
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2.1.3 Excel VBA Implementation of BET Method Applied to CBO/CLO
Mezzanine Tranche Expected Loss versus Diversity
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
5 12 16 20 24 28 32 36 40 44 48 52 56 60
TR2
26. Office of the Superintendent
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2.1.3 Excel VBA Implementation of BET Method Applied to CBO/CLO
Junior Tranche Expected Loss versus Diversity
0.31
0.32
0.33
0.34
0.35
0.36
0.37
0.38
0.39
5
12
16
20
24
28
32
36
40
44
48
52
56
60
TR3
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•OC is calculated as the ratio between the par value of
collateral and the value of the all liabilities senior to
and including the tranche being calculated.
•Once OC ratio drops below the certain level the cash
flow from the equity or lower tranche is diverted to a
risk-free reserve account.
2.1.4 Overcollateralization Tests
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2.2.1 Hazard Rate
Duffie’s approach is based on an application of reliability theory
to the default process.
Reliability theory uses a hazard rate intensity to obtain the
conditional survival probability as follows.
2.2 Duffie-Singleton Methodology
)(expexp)|( tTduFTP
T
t
t
t TtF
29. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.2 Stochastic Pre-intensity
Duffie models the hazard rate as a stochastic process that he calls the
“pre-intensity process” .
J(t)dW(t)(t)σdt)(t)-(θ)( td
The conditional survival probability is given by the following.
t
T
t
t FduuEFTP )(exp)|(
30. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.2 Stochastic Pre-intensity
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2.2 Duffie-Singleton Methodology
2.2.2 Stochastic Pre-intensity
The computation of the above expectation is quite complex. It is done in
several steps.
Step 1: The diffusion generator is determined.
)(),(),(
2
1
),(|)),((
lim
0
2
2
2
0
HdtftHfl
ff
t
f
t
tfFttttfE
Df t
t
32. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.3 Stochastic Pre-intensity
Step 2: The Feynman-Kac formula is used to obtain the following
integral-PDE equation.
0)(),(),(
2
1
0
2
2
2
HdtftHflf
ff
t
f
Step 3: The PDE is solved using an affine solution to obtain.
)()()(exp
)),(()(exp)|(
ttTtT
tTtfFduuEFTP t
T
t
t
33. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.4 Defaultable Zero Coupon Bond
The conditional survival probability is then used to derive the value of a
defaultable zero-coupon bond.
T
zero duuhurTTTtp
0
00 )()()()(exp)(),(
where the conditional default intensity is given by
)0()()()0()()(exp
)|(
)( 0
TTTT
T
FTP
Th
34. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.5 Defaultable Coupon Bond
The Duffie-Garleanu has an incorrect formula for a defaultable coupon
bond in his paper. The correct formula for a coupon bond with quarterly
payments is as follows.
0
0
00
44
exp
44
)()()()(exp)(),(
jjjC
duuhurTTTtp
T
CBond
The above formula was confirmed with both analytically and with Monte Carlo simulation
[1].
[1] Private discussion with Phelim Boyle & Zhenzhen Lai (U.Waterloo). Confirmed with Darrell Duffie.
35. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.6 Bond Hazard Rates
Suppose the are N bonds in a collateral pool, each with a hazard rate
process , (i=1,2,…N). Duffie advocates the partition of the affine
process into risk factor components.
ZYX ici )(iλ
The process Xi is unique to bond i. The process Yc(i) is common to bonds
affected by the same risk factor. The process Z is common to all bonds.
The Weiner process and jump process for each affine process is
independent.
i
36. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.6 Bond Hazard Rates
The instantaneous correlation coefficient between hazard rate processes for bonds i
and j are determined by the ratio of the jump arrival rates.
Due to independence of the affine processes, the following property holds.
t
T
t
t
T
t
ict
T
t
i
t
T
t
t
FduuZEFduuYEFduuXE
FduuEFTP
)(exp)(exp)(exp
)(exp)|(
)(
The calibration can be done similar to a 3 factor CIR spot rate model.
ij
37. Office of the Superintendent
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2.2 Duffie-Singleton Methodology
2.2.7 Simulation
The correlated default intensities are then used to determine the default statistics for the
correlated bond pool by Monte Carlo simulation.
Compensator method.
A compensator is an accumulated intensity. Consider a Poisson process Nt with intensity l(.).
t
t duulNP
0
)(exp)0(
t
T
t
t FduuEFTP )(exp)|(
In the Duffie-Singleton method, the default intensity is stochastic and is denoted by .
38. Office of the Superintendent
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
CASHFLOW CDO SPECIFICATION
nSim 1000
Issuing Date 1-Jan-00 No. of Bins 20
Maturity Date 1-Jan-10 No. of Period 120
Collateral Notional 1,000.00
No. of Tranche 3
Resrv-Accr-Rate 0.0500
Tranche Rating Tranche Principal %/Notional Coupon Frequency Coupon Rate
Class A 500.00 50.00 2 0.06500
Class B 250.00 25.00 2 0.10000
Equity 250.00 25.00 2 0.30000
EXPECTED TRANCHE LOST
Tranche Value ($) Std Deviation ($)
Class A 515.18 0.00
Class B 319.11 10.10
Equity 122.52 29.57
Note: Cell in yellow color is for displaying purpose only.
Cell in white color is for inputpurpose.
CDO ValueCDO Value Reset Histogram
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
Tranche 1
0
200
400
600
800
1000
1200
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
515.18
Histogram Tranche 1 Values
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
Tranche 2
0
100
200
300
400
500
600
700
800
900
227.47
232.21
236.96
241.71
246.45
251.20
255.95
260.70
265.44
270.19
274.94
279.69
284.43
289.18
293.93
298.67
303.42
308.17
312.92
317.66
Histogram Tranche 2 Values
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
Tranche 3
0
20
40
60
80
100
120
46.77
55.17
63.58
71.99
80.40
88.81
97.21
105.62
114.03
122.44
130.85
139.25
147.66
156.07
164.48
172.89
181.29
189.70
198.11
206.52
Histogram Tranche 3 Values
42. Office of the Superintendent
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
Tranche 1 Cash Profile
0
100
200
300
400
500
600
1-Jan-001-Jul-001-Jan-011-Jul-011-Jan-021-Jul-021-Jan-031-Jul-031-Jan-041-Jul-041-Jan-051-Jul-051-Jan-061-Jul-061-Jan-071-Jul-071-Jan-081-Jul-081-Jan-091-Jul-09
mean-std
mean
mean - std
43. Office of the Superintendent
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
Tranche 2 Cash Profile
0
50
100
150
200
250
300
1-Jan-001-Jul-001-Jan-011-Jul-011-Jan-021-Jul-021-Jan-031-Jul-031-Jan-041-Jul-041-Jan-051-Jul-051-Jan-061-Jul-061-Jan-071-Jul-071-Jan-081-Jul-081-Jan-091-Jul-09
mean-std
mean
mean - std
44. Office of the Superintendent
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2.1.7 Excel VBA with C++ DLL Implementation of Duffie-Singleton Method
Tranche 3 Cash Profile
-10
0
10
20
30
40
50
60
01-Jan-00
01-Jul-00
01-Jan-01
01-Jul-01
01-Jan-02
01-Jul-02
01-Jan-03
01-Jul-03
01-Jan-04
01-Jul-04
01-Jan-05
01-Jul-05
01-Jan-06
01-Jul-06
01-Jan-07
01-Jul-07
01-Jan-08
01-Jul-08
01-Jan-09
01-Jul-09
mean+std
mean
mean - std
45. Office of the Superintendent
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3. Calculating VaR for CDO Tranches
If it is assumed that the default pre-intensity process is
independent of the risk free interest rate dynamics, then
VaR for CDO tranches can be computed simply.
Step 1: Determine the principal components of the yield
curve [1].
Step 2: Compute the inner product of each principal
component with the mean cash flow.
Step 3: Add the components together.
[1] Jon Frye, “Principals of Risk: Finding VaR through Factor-Based Interest Rate Scenarios”, VaR Understanding and
Applying Value at Risk, Risk Publications, 1997, pp.275-287.
46. Office of the Superintendent
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4. Conclusions
• Some simple CDO have been priced using the BET and the
Duffie-Singleton approach.
• The BET method gives a reasonable approximation to the value
of a well-funded senior tranche.
• The arbitrary assumptions of the BET method makes pricing
junior tranches unreliable.
• The Duffie-Singleton method is a powerful framework for
modeling default correlation.
• The large number of parameters in the Duffie-Singleton method
makes calibration problematic. This is the subject of our future
research.
47. Office of the Superintendent
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Exploring Extensions of the
CDO Paradigm
Anthony Vaz
Robert Kowara
Carol Cheng
Capital Markets Division
OSFI
The views expressed in this presentation are
solely those of the authors.
48. Office of the Superintendent
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Outline
1. Basic CDO Archetypes
2. CDO Tranche Risk
• Conceptualization of Risk
• Delta Equivalent Portfolios
• Hedging with Delta Neutral Portfolios
3. Interest Rate Risk
• General Market Risk
• Specific Risk
4. Backtesting Interest Rate Risk
5. Regulatory Capital for CDO Tranche Risk
6. Concluding Remarks
49. Office of the Superintendent
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1. Basic CDO Archetypes
A CDO is a Collaterized Debt Obligation.
A pool of securities is used as collateral to fund a
prioritized sequence of payments. This payment
sequence is illustrated as the following “water flow” of
cash payments.
50. Office of the Superintendent
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SENIOR
TRANCHE
MEZZANINE
TRANCHE
EQUITY
TRANCHE
1. Basic CDO Archetypes
Cash Flow Water Fall
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1. Basic CDO Archetypes
Collateral Pool:
Bonds/Loans
Tranche 1
Coupons + Principal at Maturity
Tranche 2
Coupons + Principal at Maturity
Tranche N
Coupons + Principal at Maturity
Principal at Start
Principal at Start
Principal at Start
•Non-synthetic: Assets sold to Tranche holders
•Securitization of Bonds / Loans
•Fully sold structure
Bank
Sell Bonds/Loans
Receive Cash
52. Office of the Superintendent
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1. Basic CDO Archetypes
Collateral Pool:
Credit Default
Swaps
Tranche 1
Premium
Tranche 2
Premium
Tranche N
Premium
Credit Protection
Credit Protection
Credit Protection
•Synthetic: Risk sold to Tranche holders, but not ownership of assets
•Securitization of risk associated with assets (Bonds / Loans / CDS etc.)
•Fully sold structure
Bank
Receive Credit
Protection
Pay Premium
53. Office of the Superintendent
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1. Basic CDO Archetypes
Hypothetical
Collateral Pool:
Credit Default
Swaps
Tranche k
Premium
Credit Protection
•Synthetic: Risk sold to Tranche holders, but not ownership of assets
•Securitization of risk associated with a hypothetical set of Bonds / Loans / CDS
•Partially sold structure
Bank
Receive Credit
Protection
Pay Premium
•custom designed product to suit risk /reward
appetite of customer
•Bank exposed to risk of hypothetical
collateral pool (virtual securitization)
54. Office of the Superintendent
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2. CDO Tranche Risk
Holders of CDO tranches are exposed to default risk in a
prioritized manner.
•Senior tranches have the risk of investment grade bonds
•Mezzaine tranches have the risk of non-investment grade bonds
•Junior tranches have the risk of default baskets
The risk can be conceptualized in terms of valuation
dispersions and cash flow profiles on the following pages.
56. Office of the Superintendent
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2. CDO Tranche Risk
Tranche 1 Cash Profile
0
100
200
300
400
500
600
1-Jan-001-Jul-001-Jan-011-Jul-011-Jan-021-Jul-021-Jan-031-Jul-031-Jan-041-Jul-041-Jan-051-Jul-051-Jan-061-Jul-061-Jan-071-Jul-071-Jan-081-Jul-081-Jan-091-Jul-09
mean-std
mean
mean - std
Tranche 2 Cash Profile
0
50
100
150
200
250
300
1-Jan-001-Jul-001-Jan-011-Jul-011-Jan-021-Jul-021-Jan-031-Jul-031-Jan-041-Jul-041-Jan-051-Jul-051-Jan-061-Jul-061-Jan-071-Jul-071-Jan-081-Jul-081-Jan-091-Jul-09
mean-std
mean
mean - std
Tranche 3 Cash Profile
-10
0
10
20
30
40
50
60
01-Jan-00
01-Jul-00
01-Jan-01
01-Jul-01
01-Jan-02
01-Jul-02
01-Jan-03
01-Jul-03
01-Jan-04
01-Jul-04
01-Jan-05
01-Jul-05
01-Jan-06
01-Jul-06
01-Jan-07
01-Jul-07
01-Jan-08
01-Jul-08
01-Jan-09
01-Jul-09
mean+std
mean
mean - std
Cash flow profiles for a 3 tranche CDO
57. Office of the Superintendent
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2. CDO Tranche Risk
Delta Equivalent Portfolio
Tranches can be modelled approximately in terms of a
portfolio of instruments in the collaterial pool of the CDO. [1]
Hedging with Delta Neutral Portfolios
A tranche with a short position in its delta equivalent portfolio
are hedged against spread risk.
[1] Arthur Berd, “Risk Management of Credit Derivatives and Their Application as a Portfolio Management Tool”, RISK
2002 USA, (Stream 1, Day 2), Boston, June 11-12, 2002.
58. Office of the Superintendent
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3. Interest Rate Risk
Consider the case of a simple corporate bond that depends on the yield curve );( tTy where tT for the current time t .
Suppose the corporate bond pays coupons },,,{ 21 nccc at times },,,{ 21 nTTT . For simplicity of discussion, we assume the default
recovery rate is zero. The yield );( tTy is composed of two components: the risk free rate );( tTr and a spread ),;( tTs that is
dependent on the credit state )(t of the bond. Consequently, we have
),;();();( tTstTrtTy
The corporate bond can be represented as a function
tsssrrrf nn ;,,;,, 2121
where
);( tTrr ii , ),;( tTss ii , for ni ,2,1 .
The credit state can either be discrete or continuous.
If a CreditMetrics methodology is used, the credit state is discrete and usually
DEFAULTCCCBBBBBBAAAAAA ,,,,,,, .
If a default intensity process is used to model the credit state, then the credit state is ),0[ . Alternatively, a KMV approach
produces an expected default frequency (EDF), which represents the expected probability of defaulting over a given time horizon; this
corresponds to a credit state )1,0( .
59. Office of the Superintendent
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3.1 Interest Rate General Market Risk
In the context of the corporate bond example, the general market risk arises due to variations in the risk-free
rates and the spreads over a 10-day risk horizon. The general market risk associated with the corporate bond can be
computed in the following manner. Let the difference tt equal the risk horizon, typically 10 days. Let
)(t denote the credit state at time t. The general market risk (GMR) is given by the following expectation
conditioned on the filtration tF .
};,;,,,;,,;;;,,;,;
;,;,,,;,,;;;,,;,;{
2121
2121
tnn
nn
FttTstTstTstTrtTrtTrf
ttTstTstTstTrtTrtTrfStdDevGMR
The operator }{StdDev represents the standard deviation. Note the bond value at time t is computed using the
spread rates that depend on the credit state )(t .
Value at Risk (VaR) can be expressed in terms of a suitable multiplier of the standard deviation for normally
distributed P&L distributions. For non-normal distributions, a histogram of the P&L distribution is used to
determine the 99% percentile confidence level. In this example, we ignore these complications.
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3.2 Interest Rate Specific Risk – Defn 1
In the context of the corporate bond example, the general market risk arises due to variations in the risk-free
rates and the spreads over a 10 day risk horizon. The specific risk associated with the corporate bond can be
computed in the following manner. Let the difference tt equal the risk horizon, typically 10 days. Let
)(t and )(t denote the credit states at time t and time t ` respectively. The aggregate risk (AR) is given by
the following expectation conditioned on the filtration tF .
};,;,,,;,,;;;,,;,;
;,;,,,;,,;;;,,;,;{
2121
2121
tnn
nn
FttTstTstTstTrtTrtTrf
ttTstTstTstTrtTrtTrfStdDevAR
The specific risk (SR) is determined as follows.
22
GMRARSR
NOTE:
Consider two zero mean correlated scalar random variables X andY . Then 222
2 YXXXYXYXE , where 22
XXE
and 22
YYE . Let 22
2 YXXXYXA , 2
2 YXXXYS , and XG . Note, the fact that 22
GAS does not
imply 0XY . By analogy, the formula 22
GMRARSR does not imply anything regarding the independence of risk factors
associated with general or specific market risks.
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3.2 Interest Rate Specific Risk – Defn 2
Alternatively, the specific risk can be computed using a CreditMetrics framework, which ignores the
fluctuation of the interest rate and spread rate curves over the risk horizon. The only the credit state variable is
allowed to change over the risk horizon; accordingly, the credit state changes from )(t to )(t . These
assumptions result in the following definition of specific risk.
};,;,,,;,,;;;,,;,;
;,;,,,;,,;;;,,;,;{
2121
2121
tnn
nn
FttTstTstTstTrtTrtTrf
ttTstTstTstTrtTrtTrfStdDevSR
The appropriateness of these assumptions can only be determined from adequate empirical testing with market
data.
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4 Backtesting Interest Rate Risk
For simplicity, we now consider a security that only depends on one credit state and one spread rate. These can
easily be generalized.
Let the value of a security tsf ttt ,,, be a function of market variables on day t, denoted by t ;
credit state on day t, denoted by t ; and spread of the index over the risk free rate that is dependent on the credit
state t on day t, denoted by ts t , . The spread offset above the index curve associated with t on day t is denoted
by tt . Each debt security in the same credit state t has its own spread offset tt .
63. Office of the Superintendent
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4 Backtesting Interest Rate Risk
The total P&L on day t is given by
11111 1,,,,,, tttttttttt tsftsf
The general market P&L is given by
111111111 1,,,,,, tttttttttt tsftsf
The credit state t and the specific spread offset tt are held constant from day t-1 to t. The price variation arising from
fluctuation in the index curve from 1,1 ts t to ts t ,1 and market variables 1t from t are accounted for in the general
market P&L.
The specific P&L can be computed in the following manner.
1111 ,,,,,, tttttttttt tsftsf
The above computation uses the spread indices for day t to determine the spread change from the index curve with state 1t to
state t while the market variables t are held constant. The spread change arising from the change in the offset 11 tt to
tt is also used to compute the specific P&L. The specific P&L would be used to backtest the specific risk computation.
64. Office of the Superintendent
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4 Backtesting Interest Rate Risk
•This method correctly accounts for the change in P&L associated with the gradual
deterioration in credit worthiness of an obligor.
•In this manner, the price variations that precede a credit state changes are accounted for
in a continuous manner.
•This makes the interpretation of the specific P&L a useful guide for risk management
purposes.
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5. Regulatory Capital for CDO Tranche Risk
Time t
P–measure Dynamics
Time t’
Risk Horizon = 10 days
Trading Book
Q–measure Valuation
Q–measure Valuation
tNtNtNNtttttNt tstsf ,,,,1,1,11,,1 ,,,,,,,,
tNtNtNNtttttNt tstsf ,,,,1,1,11,,1 ,,,,,,,,
66. Office of the Superintendent
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Concluding Remarks
•The virtual securitizations of partially sold structures
expose banks to risks that need to be risk managed
•CDO Tranche Risk can be conceptualized simply in terms
of valuation dispersion and cash flow profiles
•Delta Equivalent Portfolios can be used to a simple
models to mange credit risk in an integrated manner
•A method of computing and backtesting both general
market and specific interest rate risk has been proposed.
•These computations can be used to determine regulatory
capital for CDO tranche risk.