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  • Merton Credit Risk Model, a Case Study
    In a previous post entitled Credit Risk Management Using Merton Model we provided a brief theoretical description of the Merton structural credit risk model. Note that,The Merton model is an analysis model – named after economist Robert C. Merton – used to assess the credit risk of a company's debt. Analysts and investors utilize the Merton model to understand how capable a company is at meeting financial obligations, servicing its debt, and weighing the general possibility that it will go into credit default…Loan officers and stocks analysts utilize the Merton model to analyze a corporation's risk of credit default. This model allows for easier valuation of the company and also helps analysts determine if the company will be able to retain solvency by analyzing maturity dates and debt totals. Read moreIn this installment, we are going to present a case study based upon the Merton credit risk model.[caption id="attachment_588" align="aligncenter" width="628"] Junior Gold Miners ETF as at Nov 28 2018. Source: stockcharts.com[/caption]Our Client is a junior gold miner.  They are looking to raise additional capital in order to finance the production of gold. The client currently has an outstanding liability in the form of future discount for the payment of deliverable gold.  According to a contingency clause, the Buyer can exercise a certain amount of cash into a secured obligation. This conversion will increase the leverage of the Company, thus leading to higher credit risks.We determined the increase in the credit risks by using the Merton structural credit model.  We estimated that if the Buyer exercises the cash conversion clause, the credit spread of the Client will increase by approximately 20%. We thus helped the Client better negotiate the deal with their counterparty.Article Source Here: Merton Credit Risk Model, a Case Study
  • Interest Rate Swap-Derivative Pricing in Excel
    An interest rate swap (IRS) is a financial derivative instrument that involves an exchange of a fixed interest rate for a floating interest rate.  More specifically,An interest rate swap's (IRS's) effective description is a derivative contract, agreed between two counterparties, which specifies the nature of an exchange of payments benchmarked against an interest rate index. The most common IRS is a fixed for floating swap, whereby one party will make payments to the other based on an initially agreed fixed rate of interest, to receive back payments based on a floating interest rate index. Each of these series of payments is termed a 'leg', so a typical IRS has both a fixed and a floating leg. The floating index is commonly an interbank offered rate (IBOR) of specific tenor in the appropriate currency of the IRS, for example LIBOR in USD, GBP, EURIBOR in EUR or STIBOR in SEK. To completely determine any IRS a number of parameters must be specified for each leg; the notional principal amount (or varying notional schedule), the start and end dates and date scheduling, the fixed rate, the chosen floating interest rate index tenor, and day count conventions for interest calculations. Read moreThe above description refers to a plain vanilla IRS. However, interest rate swaps can come in many different flavors. These include, (but are not limited to)Amortizing notional IRSCross-currency swapFloat-for-float (basis) swapOvernight index swapInflation swap etc.Interest rate swaps are often used to hedge the fluctuation in the interest rate. To value an IRS, fixed and floating legs are priced separately using the discounted cash flow approach.Below is an example of a hypothetical plain vanilla IRSMaturity: 5 yearsNotional: 10 Million EURFixed rate: 3.5%Floating rate:  EuriborThe values of the fixed, floating legs and the IRS are calculated using an Excel spreadsheet. Table below presents their valuesClick on the link below to download the Excel spreadsheet.Article Source Here: Interest Rate Swap-Derivative Pricing in Excel
  • Valuing an American Option Using Binomial Tree-Derivative Pricing in Excel
    In a previous post, we provided an example of pricing American options using an analytical approximation. Such a pricing model is fast and accurate enough for risk management purposes. However, sometimes more accurate results are required. For this purpose, the binomial (lattice) model can be used. Wikipedia describes the binomial tree model as follows,In finance, the binomial options pricing model (BOPM) provides a generalizable numerical method for the valuation of options. The binomial model was first proposed by Cox, Ross and Rubinstein in 1979. Essentially, the model uses a "discrete-time" (lattice based) model of the varying price over time of the underlying financial instrument...The binomial pricing model traces the evolution of the option's key underlying variables in discrete-time. This is done by means of a binomial lattice (tree), for a number of time steps between the valuation and expiration dates. Each node in the lattice represents a possible price of the underlying at a given point in time.Valuation is performed iteratively, starting at each of the final nodes (those that may be reached at the time of expiration), and then working backwards through the tree towards the first node (valuation date). The value computed at each stage is the value of the option at that point in time.We utilized the lattice model previously to price convertible bonds. In this post, we’re going to use it to value an American equity option. We use the same input parameters as in the previous example. Using our Excel workbook, we obtain a price of $3.30, which is smaller than the price determined by the analytical approximation (Barone-Andesi-Whaley) approach.[caption id="attachment_561" align="aligncenter" width="335"] American option valuation in Excel using Binomial Tree[/caption]Click on the link below to download the Excel Workbook.Originally Published Here: Valuing an American Option Using Binomial Tree-Derivative Pricing in Excel
  • iShares Nasdaq Biotechnology ETF (IBB) Experiences Big Inflow
    From ETF Channel: Exchange traded funds (ETFs) trade just like stocks, but instead of ”shares” investors are actually buying and selling ”units”. These ”units” can be traded back and forth just like stocks, but can also be created or destroyed… Read more › The post iShares Nasdaq Biotechnology ETF (IBB) Experiences Big Inflow appeared first on ETF Daily News.
  • Volatility Index jumps higher as stock are hammered
    From Josh Selway: U.S. stocks are getting hammered once again, as fear continues to grip Wall Street. The Dow Jones Industrial Average (DJI) and its index peers are all falling fast, last seen near session lows, putting the Dow and S&P 500 Index… Read more › The post Volatility Index jumps higher as stock are hammered appeared first on ETF Daily News.
  • Bank stocks leading the market lower today
    From Richard X. Bove: Bank stocks led the market lower once again on Monday after being largely responsible for the sell-off of the last month. There appears to be two sets of reasons as to why the bank stocks are… Read more › The post Bank stocks leading the market lower today appeared first on ETF Daily News.
  • British pound falls to a 20-month low on Brexit worries
    From Reuters: The pound slid to its weakest level in nearly 1-1/2 years against the dollar on Monday as British Prime Minister Theresa May postponed a parliamentary vote on her Brexit deal, rekindling doubts about U.K.’s departure from the European Union in… Read more › The post British pound falls to a 20-month low on Brexit worries appeared first on ETF Daily News.
  • Housing Sector Update: Homeowners equity gains are shrinking
    From Diana Olick : Homeowners in most places are still seeing their nest eggs get a little bigger, but the gains are shrinking quickly. Homeowners in most places are still seeing their nest eggs get a little bigger, but the gains… Read more › The post Housing Sector Update: Homeowners equity gains are shrinking appeared first on ETF Daily News.
  • Oil prices decline, fail to extend rally after OPEC-led production cut
    From Myra P. Saefong & RACHEL KONING BEALS: Oil futures moved lower on Monday in a bout of consolidation after an announced OPEC-led production cut on Friday triggered a rally in prices for the session and the week. West Texas… Read more › The post Oil prices decline, fail to extend rally after OPEC-led production cut appeared first on ETF Daily News.
  • Dow Jones Industrial Average drops 400 points as market sell-off continues
    From Fred Imbert: Stocks traded sharply lower on Monday in a volatile session as banks and Apple led the decline. Traders pointed to a number of reasons for the selling, including an adverse ruling in a Chinese court against Apple,… Read more › The post Dow Jones Industrial Average drops 400 points as market sell-off continues appeared first on ETF Daily News.
  • Tokyo stocks touch 18-month low in mixed Asia markets
    Pound remains under pressure amid fresh Brexit uncertainty while oil prices bounce
  • Forex markets cool after Brexit turmoil hits pound
  • Japanese stocks slip to 18-month low as Wall Street struggles
  • Fast Asia Open: Australia home prices, Philippines trade data
  • Tech helps Wall St recover but trade, Brexit cap gains
  • The pound is only getting lighter in your pocket
    Mike Mackenzie’s daily analysis of what’s moving global markets
  • S&P 500 recovers from early fall as Apple rallies
    European stocks end lower; sterling tumbles after May delays parliamentary vote
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