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Unformatted text preview: lue at Risk (VaR) One-day VaR at a 97.5% conﬁdence level:
“The probability is 97.5% that we will lose less than VaR
dollars over the next day if the portfolio remains unchanged.
Expect losses to be less than VaR 39 out of 40 days.
Expect losses to be greater than VaR 1 out of 40 days. VaR tells us absolutely nothing about how much greater than
VaR the loss on the worst day out of 40 will be. Derivatives V: R. J. Hawkins Econ 136: Financial Economics 23/ 25 Fixed-Income Analytics
The discounted cashﬂow valuation paradigm. The basis of this valuation paradigm is that
the price of a cash ﬂow is is the probability-weighted,
discounted value (or present value PV) of that cash ﬂow
and that the price of any security is the sum of the price
of the constituent cash ﬂows.
This is commonly written
T PV =
t =1 CFt
= DFt CFt
(1 + r )t where
CFt ≡ the cash ﬂow at time t . r ≡ the discount rate associated with that cash ﬂow. DFt ≡ the discount factor associated with that cash ﬂow.
Fixed Income I: R. J. Hawkins Econ 136: Financial Economics 3/ 19 Price-Yield Relationships:
Bonds with a Round Number of Coupon Periods to Maturity Recall our bond formula:
N Pbond = C /2
i i =1 (1 + Y /2)
annuity + 100
(1 + Y /2)N
PV of Princ...
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- Fall '08