1. © Brammertz Consulting, 20091Date: 01.11.2015 Unified Financial Analysis Risk & Finance Lab Chapter 8: Financial Events and Liquidity Willi Brammertz / Ioannis Akkizidis

2. © Brammertz Consulting, 20092Date: 01.11.2015 From input to analysis elements Cost

3. © Brammertz Consulting, 20093Date: 01.11.2015 Time to Maturity Volatility in t 0 (  ) Yield Static analysis (liquidation view) Type I and II analysis Time Liabilities Assets t0t0 Existing Business NPV

4. © Brammertz Consulting, 20094Date: 01.11.2015 Liquidation view Some thoughts > Concept is trading floor related (sell to the last fool) > What is value under a strict liquidation view? > How much can markets change if Δ t = 0? > Real life is going concern > Why is liquidation view still a valid concept?

5. © Brammertz Consulting, 20095Date: 01.11.2015 Contract events and cash flows > Contract events are the expression of the input elements on the time line given a state of the risk factors (state contingent cash flows) > Contract events are a level higher than cash-flows > Contract events are interpreted in two principally different ways Rock bottom of Finance

6. © Brammertz Consulting, 20096Date: 01.11.2015 Importance of event level > Rock bottom: The event level contains all information that is possible in finance > Precondition: The input elements must be rich > Contracts and behavior as open dimensions > All financial contracts are homogenous on the event level > E.g. a saving contract and an option „are equal“! > Question: Where are the events in option pricing?

7. © Brammertz Consulting, 20097Date: 01.11.2015 The five analysis elements

8. © Brammertz Consulting, 20098Date: 01.11.2015 Liquidity vs value view LiquidityZES (Chapter 10)

9. © Brammertz Consulting, 20099Date: 01.11.2015 List of important event types (RiskPro™)

10. © Brammertz Consulting, 200910Date: 01.11.2015 Events on the time line Example: Variable annuity

11. © Brammertz Consulting, 200911Date: 01.11.2015 Mathematics kicks in only after the explicit representation of the events. Example of events

12. © Brammertz Consulting, 200912Date: 01.11.2015 Example 1: Money market

13. © Brammertz Consulting, 200913Date: 01.11.2015 Example 2: Fixed bond

14. © Brammertz Consulting, 200914Date: 01.11.2015 Example 3: RGM with draw down

15. © Brammertz Consulting, 200915Date: 01.11.2015 Example 4: Variable rate bond

16. © Brammertz Consulting, 200916Date: 01.11.2015 Example 5: Variable annuity Pattern

17. © Brammertz Consulting, 200917Date: 01.11.2015 Example 5: Variable annuity Events

18. © Brammertz Consulting, 200918Date: 01.11.2015 > A swap is the simple sum of two basic contracts (example 2 + example 4) Example 6: Swap 18

19. © Brammertz Consulting, 200919Date: 01.11.2015 Example 6: Swap 19

20. © Brammertz Consulting, 200920Date: 01.11.2015 Example 7: FRA 20

21. © Brammertz Consulting, 200921Date: 01.11.2015 Example 8: Effect of behavior 21

22. © Brammertz Consulting, 200922Date: 01.11.2015 Liquidity gap > Cash management vs. Liquidity gap > Gap: numerical or graphical representation of liquidity flows on the time line > Needs definition of time buckets > Calculation: > Sum expected cash flows (forward scenario) over all relevant contracts > Group per time bucket

23. © Brammertz Consulting, 200923Date: 01.11.2015 Example: Liquidity gap results Data: Examples 1-6

24. © Brammertz Consulting, 200924Date: 01.11.2015 Marginal and cumulative liquidity gap