© brammertz consulting, 20091date: 01.11.2015 unified financial analysis risk & finance lab...

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Unified Financial AnalysisRisk & Finance Lab

Chapter 8: Financial Events and Liquidity

Willi Brammertz / Ioannis Akkizidis

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From input to analysis elements

Cost

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Time to Maturity

Volatility in t0 ()Yield

Static analysis (liquidation view)Type I and II analysis

TimeLiabilities

Assets

t0

Existing Business

Existing Business

NPV

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Liquidation viewSome thoughts

> Concept is trading floor related (sell to the last fool)

> What is value under a strict liquidation view?

> How much can markets change if Δt = 0?

> Real life is going concern

> Why is liquidation view still a valid concept?

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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

Rock bottom ofFinance

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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?

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The five analysis elements

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Liquidity vs value view

Liquidity ZES (Chapter 10)

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List of important event types(RiskPro™)

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Events on the time lineExample: Variable annuity

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Mathematics kicks in only after the explicitrepresentation of the events.

Example of events

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Example 1: Money market

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Example 2: Fixed bond

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Example 3: RGM with draw down

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Example 4: Variable rate bond

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Example 5: Variable annuityPattern

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Example 5: Variable annuityEvents

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> A swap is the simple sum of two basic contracts(example 2 + example 4)

Example 6: Swap

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Example 6: Swap

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Example 7: FRA

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Example 8: Effect of behavior

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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

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Example: Liquidity gap resultsData: Examples 1-6

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Marginal and cumulative liquidity gap