Example on cash flow diagram, Financial Management

Assignment Help:

(a) A usual cash flow diagram will incorporate the following. If you are short the CDO and then you receive a fixed amount at the initial point to. After that you make payments made of a floating risk-free rate plus a fixed spread. Nevertheless if one or more of the underlying credits default your share of the defaulted amount will be deducted from the coupon.

(b) Ever since you are receiving a spread over a floating rate the interest rate risk is minimal. There are a few risks only between the coupon payments dates. This is able to be hedged using strips of FRA's. Or else by using swaps as the reading suggests.

Or else the CDO is an investment vehicle and the investor is exposed to changes in the credit curve. If necessary such risks are able to be hedged by taking positions on a proper set of CDSs.

(c) A refuse of the overall level of interest rates means the floating rates are going down. If the investor is hedged trough the FRA's this will have no effect on the overall returns. Alternatively if default rates increase the value of the CDO will decline.

(d) As underlying credits default this will reduce the principal amount involved in the CDO during its life cycle. Alternatively if such a CDO is hedged using a swap and the swap notional will remain fixed

This signifies that a plain vanilla swap will end up introducing a basis risk. But a customized swap where the swap notional decreases as CDO principal changes will be more expensive.


Related Discussions:- Example on cash flow diagram

Financial derivatives, Do you provide plaigerism free solutions to question...

Do you provide plaigerism free solutions to questions or do you only tutor?

Bonds Valuation, Six years ago . the singleton company sold a 20 year bond ...

Six years ago . the singleton company sold a 20 year bond with a 14% annual coupon rate and a 9% call premium. today, singleton called the bonds. the bonds originally were sold at

How to calculate the net income of a year, Is the net income of a year the ...

Is the net income of a year the money the company made that particular year or is it a number whose significance is quite doubtful? The net income of a year is not money that a

Financial leverage, paid-up equty 100000 earning of the company 10000 praic...

paid-up equty 100000 earning of the company 10000 praice - earning ratio(PIE) 20 no.of equty share

Find the impact of price and trading volume, Purpose of research: The a...

Purpose of research: The aims of this research are to examine the effectiveness of speculation on efficiency of Petrochemical sector in Saudi Arabia financial market"TADAWUL".

How could we project exchange rates, How could we project exchange rates in...

How could we project exchange rates in order to be able to forecast exchange differences? If someone knew how to predict exchange rates, they would be a millionaire and would n

Prepare a trend analysis for the balance sheet, • Prepare a Trend Analysis ...

• Prepare a Trend Analysis for the Balance Sheet, Income Statement and Cash Flow Statement • This should include about 12 accounts in the Balance Sheet and about 10 Income Statemen

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd