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Session 7 Review Merck, VaR, Securitization

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Re-package and bundle into tranches. Tranches formed according to prepayment risk, maturity, interest etc. N. Takezawa (ICU) 2001 ... – PowerPoint PPT presentation

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Title: Session 7 Review Merck, VaR, Securitization


1
Session 7Review (Merck), VaR, Securitization
2
Asset Backed Securities(Securitization,???)
  • Asset.
  • Cash flows are essential. CF generated by asset.
  • Security is issued based on the CF generated by
    the asset.
  • Asset in question is separated from company
    (originator).

3
Originator
Special Purpose Vehicle (SPV)
Credit Enhancement
Securities Firm, Bank (underwrite)
Rating Agencies
Investor
4
Securitizing Building
  • Examples Toho Insurance and Daiwa Insurance. Very
    recently-Long Term Credit Banks HQ Bldg.
  • In general, SPC issues bond (security) based on
    CF of building.
  • Merits Company can reduce assets thus increase
    ROA. Investors can invest in just the building
    and not the company in question.

5
Collateralized Mortgage Obligations
(CMO)???????????
  • Form a pool of MBS and/or housing loans
    (mortgages).
  • Re-package and bundle into tranches.
  • Tranches formed according to prepayment risk,
    maturity, interest etc.

6
Short-term investors
Tranche one
Tranche two
Long-term investors
Tranche three
maturity
7
Value-at-Risk (VaR)
  • The amount of money that a firm can lose (or
    gain) due to changes in prices of underlying
    assets.
  • It is a statistical forecast based on
    historical data.
  • It is a number (s).
  • Look at hand-outs (graphs)

8
Value-at-Risk (VaR)
  • Using current prices we can determine the current
    value of our portfolio (cash flows).
  • Then we conduct a simulation. The price is
    allowed to vary (randomly). Thus, we can value
    our current portfolio using forecasted prices.
  • Plot the difference between the current value of
    the portfolio and simulated portfolio value.
  • This should give us a distribution.

9
Current FX Rate
Current Cash Flow
Take Difference
Simulated FX Rate
Forecasted Cash Flow
Simulated FX Rate
Forecasted Cash Flow
10
Cash Flows
  • We need a model (planning model)
  • Forecast the revenue
  • Forecast the expenditures
  • Given different FX (prices) rates we can then
    determine the net income.
  • Graph (frequency distribution) net income to get
    a distribution.
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