Browsing articles in "Technical papers"

Modern Collateral Management

The creation and optimal steering of collateral is key for Financial institutions.

Collateral is inter alia needed

  • to get financing from the ECB through repo transactions
  • to get funding for OTC derivatives, especially for FX swaps
  • as a pledge to central counterparties, for margining and clearing (EMIR)
    and tri-party-repo business
  • for secured funding
  • as HQLA (High Quality Liquid Assets) to improve the LCR (Basel III)
  • for direct refinancing by means of the ECB ABSPP-program (Funding)

The challenging market environment paralleled by rating downgrades led to a growth in demand for appropiate collateral. We can summarise that expensive and sparse collateral leads to business restrictions for Financial institutions and that the availability of suitable collateral is one of the key drivers to succeed in the financial markets at least in the near future.

A modern collateral managment system is characterisized by

  • an active role taking into account pricing aspects and an optimal allocation subject to eligibility criteria
  • a close link to the cash flow steering department of the Financial institution
  • the ability to map collateral generating transactions
  • the ability to measure the effects of collateral generating transactions
  • a transfer pricing system (STP)

Derivative financial instruments in Asset Liability Management


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As a basis for measuring risk for negative cash flow deviations of the assets and liabilities from derivative financial instruments we can use the expected cash flow or an alpha-quantile.
The latter consideration leads to the concept of Cash Flow at Risk, an equivalent approach to Value at Risk approach to market risk and credit risk assessment. For the purposes of the calculation of transfer prices …

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Leveraged Buyout – Risk measurement, Rating and Hedging


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This block deals with special subjects of the risk measurement and assessment of structured finance transactions. The block devotes himself exactly to the cut area of both core competences of SQF, the risk measurement and the implementing of financing structures.

We welcome your comments and ideas.
Leveraged Buyout – Riskmeasurement, Rating and Hedging

Leveraged Buyout – Risk measurement, Rating and Hedging

The following elaboration deals with the problem of the assessment of share LBO financing tranches and is to be understood among other things as a contribution concerning the development of a sound rating model for Leveraged Buyouts.

  • Problem formulation from a structural point of view

    In a share LBO deal an enterprise takeover is carried out by the majority acquisition of shares of the company to be taken over. The acquisition is achieved with a “Leverage”, i.e. beside equity different outside debt and mezzanine tranches are used for the acquisition. The so-called equity sponsor (normally a private equity company) founds moreover as a rule a special finance company which signs responsible for the acquisition of the majority holding of the enterprise to be taken over directly or indirectly. The financing tranches are served from the dividends of the acquired companies capital (shares).

    In this connection obvious questions arise concerning the assessment and the subdivision of the risks of the takeover. Beside liquidity and market risks in particular loan failure risks of the financing tranches are in the foreground, on this occasion. The extent of the loan failure risk is determined basically by the performance of the share price of the enterprise to be taken over. In particular at least the purchase price should be achieved at the time of the resale (exit) of the acquired shares including the interest payments to reach the repayment of the financing tranches. The financing tranches are structured according to the expected payment streams of the years up to the exit. Liquidity lines, senior loans with different maturities, mezzanine advances with payment in kind (PIK) components and subordinated so-called second lien advances which are often taken by the seller have their own characteristics.

  • Problem formulation from a financial mathematics point of view

    In a Merton-or so-called asset value default model the loan event is derived indirectly. In this model class the likelyhood of default equals the probability a deterministic (easier models) or a stochastic barrier is broken through by a worth-propelling process, like the property value process of the assets of the firm. The property value process of the assets is not measurable in the market, this makes the actual use of this model class, in particular concerning the calibration of CreditSpreads, difficultly. In the case of the risk measurement in a LBO the assets side consists of the shares of the enterprise to be taken over. Should a portion of the share capital be listed furthermore in free trade, the share prices, whose growth or decline determises the failure of a tranche, can be used as a basis for the valuation.. Structural tranche events, like the drawing of liquidity lines, PIK payments or additional payments of interest can be also modeled with a barrier model for the share price. On this occasion, we can be fall back on results of the assessment of so-called “Hybrid Equity Derivatives”.

  • Task: Risk measurement and hegding of the tranches of funding

    In the first step a general loan risk model is derived for the assessment of the single tranches of funding which produces the connection between the rating of the tranches, the share value of the enterprise, hedging and the Value at Risk of the positions. Moreover a stochastic model with a Brownian movement is chosen as a propelling process. In the second step the model acceptance of the Brownian movement is given up and more involved stochastic processes are chosen.
    Another main focus of the elaboration lies in the analysis of the hedging positions. Moreover a procedure of the MonteCarlo simulation which needs a certain expenditure in numerical and statistical evaluations is used. All necessary calculations can be done in market-customary software like R or SAS .

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MonteCarlo Simulation and Hedging

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Valuation of hybrid capital according to IAS 32 and IAS 39

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Actuarially valuation of structured finance ratings

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