2012-10-22

PRMIA Event on Discounting after the Financial Crisis

The PRIMIA Munich Chapter invited its community to a meeting with Dr. Roland Stamm, Deutsche Pfandbriefbank, and his talk about the "Discounting and Curve Construction Since the Beginning of Financial Crisis 2007" on the 18th of October 2012.



In the aftermath of the financial crisis one major pillar of financial engineering and risk-free pricing has disappeared: Interest rates for lending and borrowing money can no longer be assumed to be more or less equal. When spreads between lending and borrowing widened after 2007, financial engineers realized they had to look for new approaches to product pricing.

Even relatively simple products like basis swaps turned into a big challenge. Before the crisis, swaps could be priced very objectively from a known interest rate curve. After the crisis counter party risks started to play a major role. This not only affects the valuation of hedging instruments but also the valuation of collateral that nowadays has to be provided and actively updated during a product's life cycle.

Trading swaps between banks also has become a problem. Very often it is simply not possible to agree on one price. Financial engineers are just starting to establish theories to cope with this complicated world. Before the crisis structured products were challenging. Now, simple products can pose an even bigger challenge.







3 comments:

Xander Lawson said...

You know your country's economy is in a bad way when even grocery prices are going haywire. It's interesting to think how much different things might have been with proper global wealth management.

Felicity Mozdzen said...

I guess companies should know better and have a scheduled business mentoring program once in a while. You can't risk going out unarmed considering the turbulent economy we are having.

Bethany Morrison said...

I agree with Felicity. It also helps to undergo a BCM or business continuity management so businesses can determine threats to their organisation and the impacts it could cause to their operations. This way, they can prepare themselves for any unpredictable incidents.

-Bethany Morrison

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