Lug 282019
 

L’iniziativa di Finriskalert.it “Il termometro dei mercati finanziari” vuole presentare un indicatore settimanale sul grado di turbolenza/tensione dei mercati finanziari, con particolare attenzione all’Italia.

Significato degli indicatori

  • Rendimento borsa italiana: rendimento settimanale dell’indice della borsa italiana FTSEMIB;
  • Volatilità implicita borsa italiana: volatilità implicita calcolata considerando le opzioni at-the-money sul FTSEMIB a 3 mesi;
  • Future borsa italiana: valore del future sul FTSEMIB;
  • CDS principali banche 10Ysub: CDS medio delle obbligazioni subordinate a 10 anni delle principali banche italiane (Unicredit, Intesa San Paolo, MPS, Banco BPM);
  • Tasso di interesse ITA 2Y: tasso di interesse costruito sulla curva dei BTP con scadenza a due anni;
  • Spread ITA 10Y/2Y : differenza del tasso di interesse dei BTP a 10 anni e a 2 anni;
  • Rendimento borsa europea: rendimento settimanale dell’indice delle borse europee Eurostoxx;
  • Volatilità implicita borsa europea: volatilità implicita calcolata sulle opzioni at-the-money sull’indice Eurostoxx a scadenza 3 mesi;
  • Rendimento borsa ITA/Europa: differenza tra il rendimento settimanale della borsa italiana e quello delle borse europee, calcolato sugli indici FTSEMIB e Eurostoxx;
  • Spread ITA/GER: differenza tra i tassi di interesse italiani e tedeschi a 10 anni;
  • Spread EU/GER: differenza media tra i tassi di interesse dei principali paesi europei (Francia, Belgio, Spagna, Italia, Olanda) e quelli tedeschi a 10 anni;
  • Euro/dollaro: tasso di cambio euro/dollaro;
  • Spread US/GER 10Y: spread tra i tassi di interesse degli Stati Uniti e quelli tedeschi con scadenza 10 anni;
  • Prezzo Oro: quotazione dell’oro (in USD)
  • Spread 10Y/2Y Euro Swap Curve: differenza del tasso della curva EURO ZONE IRS 3M a 10Y e 2Y;
  • Euribor 6M: tasso euribor a 6 mesi.

I colori sono assegnati in un’ottica VaR: se il valore riportato è superiore (inferiore) al quantile al 15%, il colore utilizzato è l’arancione. Se il valore riportato è superiore (inferiore) al quantile al 5% il colore utilizzato è il rosso. La banda (verso l’alto o verso il basso) viene selezionata, a seconda dell’indicatore, nella direzione dell’instabilità del mercato. I quantili vengono ricostruiti prendendo la serie storica di un anno di osservazioni: ad esempio, un valore in una casella rossa significa che appartiene al 5% dei valori meno positivi riscontrati nell’ultimo anno. Per le prime tre voci della sezione “Politica Monetaria”, le bande per definire il colore sono simmetriche (valori in positivo e in negativo). I dati riportati provengono dal database Thomson Reuters. Infine, la tendenza mostra la dinamica in atto e viene rappresentata dalle frecce: ↑,↓, ↔  indicano rispettivamente miglioramento, peggioramento, stabilità rispetto alla rilevazione precedente.

Disclaimer: Le informazioni contenute in questa pagina sono esclusivamente a scopo informativo e per uso personale. Le informazioni possono essere modificate da finriskalert.it in qualsiasi momento e senza preavviso. Finriskalert.it non può fornire alcuna garanzia in merito all’affidabilità, completezza, esattezza ed attualità dei dati riportati e, pertanto, non assume alcuna responsabilità per qualsiasi danno legato all’uso, proprio o improprio delle informazioni contenute in questa pagina. I contenuti presenti in questa pagina non devono in alcun modo essere intesi come consigli finanziari, economici, giuridici, fiscali o di altra natura e nessuna decisione d’investimento o qualsiasi altra decisione deve essere presa unicamente sulla base di questi dati.

Lug 262019
 

Last 21.05.2019 EIOPA (European Insurance and Occupational Pensions Authority) published the calculation of the Ultimate Forward Rate (UFR) applicable as of 2020.

The value to apply for the EUR currency is 3.75%.

Actually, the EUR calculated value would be 3.55%, but because of both the current value (3.90%) and the limit on the maximum annual change (15 bps), the applicable UFR for the EUR currency is floored to 3.75%. The EUR UFR has been previously equal to 4.20% (2017), 4.05% (2018) and 3.90% (2019).

The methodology to derive the UFR was decided by EIOPA at the end of March 2017. EIOPA calculates the UFRs on an annual basis, by the end of March, and, if they are sufficiently different from those in place, requires an update 9 months after the announcement, at the beginning of the following year.

The change in the UFR is limited in such a way that either it can increase/decrease by 15bps, or it remains unchanged:

As the UFR is a target for the long-term Nominal rates, it is defined as the sum of two components:

  • Expected Real rate

This is the same for all currencies.

It is updated yearly, being the simple average of the past real rates since 1961 to the year before the calculation of the UFR.

Each annual real rate is derived as the simple arithmetic mean of the annual real rates of Belgium, Germany, France, Italy, the Netherlands, the United Kingdom and the United States. For each of those years and each country the annual real rate is calculated as follows:

Real rate = (short-term Nominal rate – Inflation rate) / (1+Inflation rate).

  • The short-term Nominal rates are taken from the annual macro-economic database of the European Commission (AMECO database)
    • The inflation rates are taken from the Main Economic Indicators database of the OECD

The following chart shows the Real rates time series updated at 2019 (till 2018)

The time series is currently composed by 58 items, with the last observation, related to 2018, that enters the vector with a value of -1.68%.

The simple average gives a value of 1.51312%, rounded up to 1.55%.

Indeed, the expected real rate is rounded to full five basis points as follows:

  • when the unrounded rate is lower than the rounded rate of the previous year, the rate is rounded upwards
  • when the unrounded rate is higher than the rounded rate of the previous year, the rate is rounded downwards.
  • Expected Inflation rate

This is currency specific.

It remains unchanged over time and it is based on the inflation targets of the central banks, assuming the values of 1%, 2%, 3% or 4% (e.g. 2% when the target is higher than 1%, but lower than 3%).

Where a central bank is not targeting a specific inflation figure but tries to keep the inflation in a specified corridor, the midpoint of that corridor is relevant for the allocation to the four inflation rate buckets.

For currencies where the central bank has not announced an inflation target, the expected inflation rate is 2% by default. However, where past inflation experience and projection of inflations both clearly indicate that the inflation of a currency is expected in the long-term to be at least 1 percentage point higher or lower than 2%, the expected inflation rate will be chosen in accordance with those indications. The expected inflation rate will be rounded downwards to full percentage points. The past experience is assessed against the average of a 10 years time series and the projection is derived by the means of an ARMA model. The table below summarized the UFRs values for the major currencies.

Lug 202019
 

L’iniziativa di Finriskalert.it “Il termometro dei mercati finanziari” vuole presentare un indicatore settimanale sul grado di turbolenza/tensione dei mercati finanziari, con particolare attenzione all’Italia.

Significato degli indicatori

  • Rendimento borsa italiana: rendimento settimanale dell’indice della borsa italiana FTSEMIB;
  • Volatilità implicita borsa italiana: volatilità implicita calcolata considerando le opzioni at-the-money sul FTSEMIB a 3 mesi;
  • Future borsa italiana: valore del future sul FTSEMIB;
  • CDS principali banche 10Ysub: CDS medio delle obbligazioni subordinate a 10 anni delle principali banche italiane (Unicredit, Intesa San Paolo, MPS, Banco BPM);
  • Tasso di interesse ITA 2Y: tasso di interesse costruito sulla curva dei BTP con scadenza a due anni;
  • Spread ITA 10Y/2Y : differenza del tasso di interesse dei BTP a 10 anni e a 2 anni;
  • Rendimento borsa europea: rendimento settimanale dell’indice delle borse europee Eurostoxx;
  • Volatilità implicita borsa europea: volatilità implicita calcolata sulle opzioni at-the-money sull’indice Eurostoxx a scadenza 3 mesi;
  • Rendimento borsa ITA/Europa: differenza tra il rendimento settimanale della borsa italiana e quello delle borse europee, calcolato sugli indici FTSEMIB e Eurostoxx;
  • Spread ITA/GER: differenza tra i tassi di interesse italiani e tedeschi a 10 anni;
  • Spread EU/GER: differenza media tra i tassi di interesse dei principali paesi europei (Francia, Belgio, Spagna, Italia, Olanda) e quelli tedeschi a 10 anni;
  • Euro/dollaro: tasso di cambio euro/dollaro;
  • Spread US/GER 10Y: spread tra i tassi di interesse degli Stati Uniti e quelli tedeschi con scadenza 10 anni;
  • Prezzo Oro: quotazione dell’oro (in USD)
  • Spread 10Y/2Y Euro Swap Curve: differenza del tasso della curva EURO ZONE IRS 3M a 10Y e 2Y;
  • Euribor 6M: tasso euribor a 6 mesi.

I colori sono assegnati in un’ottica VaR: se il valore riportato è superiore (inferiore) al quantile al 15%, il colore utilizzato è l’arancione. Se il valore riportato è superiore (inferiore) al quantile al 5% il colore utilizzato è il rosso. La banda (verso l’alto o verso il basso) viene selezionata, a seconda dell’indicatore, nella direzione dell’instabilità del mercato. I quantili vengono ricostruiti prendendo la serie storica di un anno di osservazioni: ad esempio, un valore in una casella rossa significa che appartiene al 5% dei valori meno positivi riscontrati nell’ultimo anno. Per le prime tre voci della sezione “Politica Monetaria”, le bande per definire il colore sono simmetriche (valori in positivo e in negativo). I dati riportati provengono dal database Thomson Reuters. Infine, la tendenza mostra la dinamica in atto e viene rappresentata dalle frecce: ↑,↓, ↔  indicano rispettivamente miglioramento, peggioramento, stabilità rispetto alla rilevazione precedente.

Disclaimer: Le informazioni contenute in questa pagina sono esclusivamente a scopo informativo e per uso personale. Le informazioni possono essere modificate da finriskalert.it in qualsiasi momento e senza preavviso. Finriskalert.it non può fornire alcuna garanzia in merito all’affidabilità, completezza, esattezza ed attualità dei dati riportati e, pertanto, non assume alcuna responsabilità per qualsiasi danno legato all’uso, proprio o improprio delle informazioni contenute in questa pagina. I contenuti presenti in questa pagina non devono in alcun modo essere intesi come consigli finanziari, economici, giuridici, fiscali o di altra natura e nessuna decisione d’investimento o qualsiasi altra decisione deve essere presa unicamente sulla base di questi dati.

Lug 182019
 

1  Introduction

In the first part of this article, we sketched a general framework to calculate the bank’s value. In this second part of the article, we will show how to apply the framework to the evaluation of a contract that is inserted in the existing bank’s balance sheet and how to properly compute the xVAs quantities. Finally, we will see how to conciliate the apparently theoretical unsound market practices to evaluate derivative contracts, and the nowadays standard results of the modern financial theory, namely the Modigliani-Miller (MM) theorem (see Modigliani and Miller, [3]).

An extended version of this work, with the details of the analytical results, is available at www.iasonltd.com in the research section.

2  A Non-Trivial Set-Up to Evaluate Contracts

 We can specify the general framework sketched in the first part to evaluate the incremental contribution of a contingent claim in the balance sheet of the bank. First, we outline how to calculate the value of the bank; then, we will assess how the insertion of a new contract in the bank’s balance sheet impacts the value.

3  Incremental Valuation of a New Contract

4  Reconciliation with the Modigliani&Miller Theorem

 Elsewhere,[1] we had to opportunity to stress that the incremental valuation framework that we introduced above is not in contrast with the main tenet of the Modigliani&Miller (MM) theorem, expounded by the two authors in their article of 1958 (see [3]).[2] On the contrary, when evaluating an investment that is included within the balance sheet of a company (bank) that has already started its operations, then the only way to keep the total value of the assets of the company equal to the total value of the liabilities, is to apply the principles of the incremental valuation stated in Castagna [2] to the non trivial framework sketched above.

In the recent work by Andersen et al. [1], the Modigliani&Miller theorem is proved to be correct when calculating the incremental value of a contract with respect to the total firm value, which is equal to the total value of the assets. In this case, the authors prove that the correct incremental value is given by the “pure” value, deducted of the CVA  and incremented by the DVA, and it is independent from the way it is financed.

In our framework, we calculate the value of a contract only with respect to the value of the bank to the shareholders, because we think this is the only meaningful way the indifference to inclusion of the contract in the balance sheet to all stakeholders. When considering the total value of the firm, the evaluator allows for wealth transfers from shareholders to claimants of higher order, such as bondholders (see Andersen et al. [1], pag. 159). On the contrary, when considering the incremental value with respect to the shareholders’ bank value, no wealth transfer is allowed and the contract value is such that all claimants are indifferent to it. Sure, such a value entails additional costs that have to be paid by the counterparty, but here we enter in the market action, where the price of the contract is determined. The price can be set at a level that matches the internal incremental valuation of the bank, thus generating a nil net contribution to the bank value; or it can be different, with a net positive or negative contribution. In any case, the price setting is the result of the bargaining process where the strengths of the bank and of the counterparty clashes and, possibly, they eventually agree to close the deal.

We think that the approach that we have detailed above and that relies on the simpler, but in any case complete, setting in Castagna [2], is in line with Proposition III of Modigliani and Miller [3], where the the optimal investment rule is derived: basically, when the firm (i.e.: the manager) is acting in the shareholders’ best interest, it will undertake an investment only if its rate of return is at least equal, or above the rate of return required by the market for a class of risk corresponding to the riskiness of the firm. In our approach, we are internally setting the rate of return of a new contract by adding all the adjustments that make its rate of return equal to the appropriate rate of return. The latter is determined by the current composition of the assets and their related risks, and by the debt and equity capital financing it, whose costs mirror the leverage and the risk premium above the risk-free rate requested by the debt-holders and shareholders.

In our opinion, in Modigliani and Miller [3] it is Proposition III that has a normative value and that should be considered when designing a framework to evaluate new contracts. Proposition I and II, in the same article, have a positive value describing the equilibrium that can be retrieved ex post, equating the return of the assets to the average cost of capital, whichever mix the firm chooses to finance them. But both propositions are not including investments that produce a loss of wealth of one of the stakeholders in favour of another stakeholder: these investments are clearly excluded by Proposition III. Following the latter, we were able to derive the rules that determine the hurdle rate at which the actual contribution of contract to the (shareholders’ bank value) is nil. It is clear that accepting only the investments that comply with Proposition III, also Proposition I and II will be proved to be true, provided we are working in a frictionless, perfect financial market.

5  Conclusion

 In this work we have extended the approach of Castagna [2] to a non-trivial setting to calculate the incremental value of a contract that is included in the bank’s balance sheet. A similar approach has been recently developed by see Andersen et al. [1]. To our knowledge, our framework is richer than those appeared since now in literature, in that we include a firm structural framework within a classical general equilibrium framework.

The framework considers different financing policies and consistently derives all the adjustment to the “pure” value of a contract, including the CVA , the FVA and, implicitly, the LLVA . We are also able to derive, in a natural fashion, an adjustment that relates to the KVA. In our structural, general-equilibrium enhanced framework setting, we do not only flesh out the origin of the KVA, but we can also identify the cases in which its inclusion is admissible in the evaluation, which is the correct premium to consider and, moreover, we can spot potential double counting of the adjustment.

References

[1]  L Andersen, D. Duffie, and Y.. Song.  Funding value adjustmentss.   Journal of Finance, LXXIV(1):145–191, 2019.

[2]  A. Castagna.  Towards a theory of internal valuation and transfer pricing of products in a bank: Funding, credit risk and economic capital.   Iason research paper. Available at http://www.iasonltd.com, 2013.

[3]  F. Modigliani and M.H. Miller.  The cost of capital, corporation finance and the theory of investment.   The American Economic Review, 48(3):261–297, 1958.



[1] See Castagna [2].

[2] We would like to recall here the MM theorem proves that the value of a project is independent from the way it is financed, or from the capital structure of the company undertaking it.

Lug 182019
 

The European Banking Authority (EBA) published today the findings of its analysis on the regulatory framework applicable to FinTech firms when accessing the market…

https://eba.europa.eu/-/eba-publishes-report-on-regulatory-perimeter-regulatory-status-and-authorisation-approaches-in-relation-to-fintech-activities