Interpolation of discount factors

This paper deals with the problem of interpolation of discount factors between time buckets. The problem occurs when price and interest rate data of a market segment are assigned to discrete time buckets. A simple criterion is developed in order to identify arbitrage-free robust interpolation methods. Methods closely examined include linear, exponential and weighted exponential interpolation. Weighted exponential interpolation, a method still preferred by some banks and also offered by commercial software vendors, creates several problems and therefore makes simple exponential interpolation a more logical choice. Linear interpolation provides a good approximation of exponential interpolation for a sufficiently dense time grid. --

Deskription und Bewertung strukturierter Produkte unter besonderer Berücksichtigung verschiedener Marktszenarien

Due to a fast market development in volume and innovation on the structured products (certificates) side, critics are finding fault regarding a lack in transparency and comparability. However, certificates can provide characteristics for every market scenario as its explicit strength. The aim of the following working paper is to provide transparency and an analysis in the most common certificates. The analysis consists of a description, valuation and scenario analysis which then leads to a substantial overview and should provide knowledge which certificate can be used in specific market scenarios. --Financial engineering,strukturierte Produkte,Zertifikate,evaluation by duplication,Discountzertifikate,Aktienanleihe,Doppel-Aktienanleihe,Cheapest-to-deliver-Zertifikat,Bonus-Zertifikat,Sprint-Zertifikat,Outperformance-Zertifikat,Reverse Sprint-Zertifikat,Reverse Outperformance-Zertifikat

Risikosteuerung mit Kreditderivaten unter besonderer Berücksichtigung von Credit Default Swaps

Within the last decade, credit risk management of financial institutions has been subject to major changes due to the development of the credit derivatives market. In the past, financial institutions merely had the possibility to manage their credit portfolio by either approving or refusing a credit request. Having made a decision, there was hardly any chance to influence the portfolio at a later stage. Alternative solutions for risk mitigation like selling the obligation (e.g. via an Asset Backed SecurityTransaction) or claiming further collateral were relatively complicated, cost-intensive and of doubtable success primarily due to their dependency on legal requirements and/or negotiation skills. With the emergence of credit derivatives, risk management has received a broad range of possibilities to transfer credit risk easily without affecting the credit relationship. In other words, credit derivatives enable the separation of credit risk from the original obligation and trading of the risk by itself. Therefore, credit portfolios can be managed actively at every stage. --Credit derivatives,credit derivatives market,credit default swap,credit risk transfer,pricing,valuation,default spread,implicit default probability,risk control,risk management,credit portfolio management,banking supervision,Basel II,credit risk mitigation

Modellierung des Kreditrisikos im Einwertpapierfall

The current financial market crisis has impressively demonstrated the importance of an effective credit risk management for financial institutions. At the same time, the use and the valuation of credit derivatives has been widely criticised as a result of the crisis. Over the past decade, credit derivatives emerged as an important part of credit risk management as these offer a broad range of possibilities to reduce credit risk through active credit portfolio management. This has represented a quantum leap in the further development of credit risk management. Credit risk management, without using credit derivatives, no longer seems to be an appropriate alternative. However, correct valuation of these derivatives is still challenging. The crisis has demonstrated that the issue is less about using credit derivatives than about developing valid valuation techniques. A sound understanding of already existing credit pricing models is necessary for such a development. These models are the key focus of this working paper. --Credit risk pricing models,asset-based models,asset-value models,structural models,intensity-based models,reduced-form models,credit derivatives,credit default swap,pricing,valuation,default spread,risk management,credit portfolio management

Modellierung des Kreditrisikos im Portfoliofall

The current financial market crisis has impressively demonstrated the importance of an effective credit risk management for financial institutions. At the same time, the use and the valuation of credit derivatives has been widely criticised as a result of the crisis. Over the past decade, credit derivatives emerged as an important part of credit risk management as these offer a broad range of possibilities to reduce credit risk through active credit portfolio management. This has represented a quantum leap in the further development of credit risk management. Credit risk management without using credit derivatives no longer seems to be an appropriate alternative. However, correct valuation of these derivatives is still challenging. The crisis has demonstrated that the issue is less about using credit derivatives than about developing valid valuation techniques. A sound understanding of already existing credit pricing models is necessary for such a development. These models are the key focus of this working paper. --Credit risk pricing models,asset-based models,asset-value models,structural models,intensity-based models,reduced-form models,credit derivatives,credit default swap,pricing,valuation,default spread,risk management,credit portfolio management

Konvergenz der binomialen Optionspreismodelle gegen das Modell von Black/Scholes/Merton

--

Interpolation of discount factors

This paper deals with the problem of interpolation of discount factors between time buckets. The problem occurs when price and interest rate data of a market segment are assigned to discrete time buckets. A simple criterion is developed in order to identify arbitrage-free robust interpolation methods. Methods closely examined include linear, exponential and weighted exponential interpolation. Weighted exponential interpolation, a method still preferred by some banks and also offered by commercial software vendors, creates several problems and therefore makes simple exponential interpolation a more logical choice. Linear interpolation provides a good approximation of exponential interpolation for a sufficiently dense time grid

Komponenten und Determinanten des Credit Spreads: Empirische Untersuchung während Phasen von Marktstress

The credit crisis and the following sovereign debt crisis during 2007 and 2012 led to an increasing volatility of European corporate bond credit spreads. European investment grade credit spreads rose in 2007 and 2008 from 50 BP to over 350 BP. In the years after the credit spreads declined to 100 BP caused by global central bank interventions. Since 2010 the sovereign debt crisis in the eurozone intensified and credit spreads simultaneously widened to 200 BP. This paper defines the components of the credit spread by analysing different risk factors of corporate bonds such as credit risk, market risk and residual spread risk. To specify the proper credit spread level, various mesurement methods like the yield to maturity, zero rate, z-spread and credit default swaps are compared. To better understand the changes of credit spreads over time this paper further discusses the determining drivers of the credit spread. Backed by a theoretical framework the relevant drivers of the credit spread changes are the term structure of interest rates, the economic cycle, the enterprise value and the market liquidity. The credit spread drivers are empirically tested in a regression analysis using European investment grade corporate bond data during 2007 and 2012

Das IRB-Modell des Kreditrisikos im Vergleich zum Modell einer logarithmisch normalverteilten Verlustfunktion

In 2004 the Basel Committee published an extensive revision of the capital charges which creates more risk sensitive capital requirements for banks. The New Accord called International Convergence of Capital Measurement and Capital Standard provides in its first pillar for a finer measurement of credit risk. Banks that have received supervisory approval to use the Internal Ratings-Based (IRB) approach may rely on their own internal estimates of risk components in determining the capital requirement for a given exposure. The IRB approach is based on measures of unexpected losses (UL) and expected losses (EL). The risk-weight functions produce capital requirements for the UL portion are based on a onefactor (Merton) model which relies furthermore on the assumption of an infinite fine-grained credit portfolio (also known as Vasicek-Model). As Moody´s stated in 2000: Empirical tests verified the log normal distribution for granular pools. we compared both models in order to benchmark the IRB approach with an existing and in practice already verified model which obviously uses similar assumptions. We, therefore, compute the capital requirement or Credit Value at Risk for given portfolios in both approaches respectively and contrast the results