Evaluating Projects under Uncertainty
|
|
- Gilbert Tyler
- 6 years ago
- Views:
Transcription
1 Evaluaing Projecs under Uncerainy March 17, 4 1 Projec risk = possible variaion in cash flows 2 1
2 Commonly used measure of projec risk is he variabiliy of he reurn 3 Mehods of dealing wih uncerainy in projec evaluaions Sensiiviy analysis Risk adjused MARR Probabiliy rees Mone Carlo simulaions 4 2
3 Example showing how use of risk-adjused MARRs can lead o he wrong decision (from Sullivan e al, Engineering Economy, (11h ed), p. 445) The Alas Corporaion is considering wo alernaives, boh affeced by uncerainy o differen degrees, for increasing he recovery of a precious meal from is smeling process. The firm s MARR for is risk-free invesmens is 10% per year. Alernaive End-of-year, k P Q 0-160, , ,000 20, ,000 60, , ,000 60,000 Because of echnical consideraions, Alernaive P is hough o be more uncerain han Alernaive Q. Therefore, according o he Alas Corporaion s Engineering Economy Handbook, he risk-adjused MARR applied o P will be 20% per year and he risk-adjused MARR for Q has been se a 17% per year. Which alernaive should be recommended? 5 Soluion A he risk-free MARR, boh alernaives have he same PW of $39, 659. Wha o do? All else equal, choose Q, because i is less uncerain (hence less riskier) han P. Bu now, do a PW analysis, using Alas Corporaion s prescribed risk-adjused MARRs for he wo opions: PW P = -160, ,000 (P/F, 20%, 1) + 60,000 (P/F, 20%, 2) + 60,000 (P/F, 20%, 4) = $10,602 PW Q = -160, ,827 (P/F,17%,1) + 60,000 (P/F,17%, 2) + 120,000 (P/F,17%,3) ,000 (P/F,17%, 4) = $8575 Hence according o his mehod we would choose P. In oher words, using he risk-adjused MARRs makes he more uncerain projec, P, look MORE aracive han Q!! 6 3
4 Soluion (cond.) From Sullivan e al, p Example of probabilisic analysis Consider he simple decision wheher o make a new invesmen, when here is uncerainy abou he duraion of demand. I0 = 6800 R = 7000/yr M = 0 + (n-1)1000 i = 20% N IN The probabiliy of demand for he service provided by his asse persising for: 1yr 0.1 2yr 0.2 3yr 0.3 4yr 0.4 Quesion: Should his invesmen be made? 8 4
5 Example (coninued) Quesion: Should his invesmen be made? LAC = I o ( A / P,20%,N) - I N ( A / F,20%, N) ( A /G, 20%, N) N LAC Levelized OI (P/A,20%,N) PW of O.I. Probabiliy yr p=0.1 PW = px PW = Yes 2yr p=0.2 PW=-828 p x PW = yr p=0.3 PW = 6 p x PW = 2 4 yr p = 0.4 PW = 352 p x PW = 141 Expeced Value = -$236 No 0 9 The Problem of Invesmen Timing Example 1: Uncerainy over Prices Widge facory Iniial cos = I = $1600 Annual operaing cos = 0 Producion rae = 1 widge per year Curren widge price = $ Price nex year (and forever afer): $300 wih probabiliy 0.5 $100 wih probabiliy 0.5 =0 =1 =2 0.5 P1 = $300 P2 = $300 Po = $ 0.5 P1 = $100 P2 = 100 Assume ineres rae of 10%/yr Quesion: Should he firm inves now, or should i wai for 1 year and see wheher he price of widges goes up or down? 10 5
6 Example 1 (cond.) Since expeced price of widges is always $, he NPV of an invesmen now is NPV = Â 0 = = $600 (1+ 0.1) Thus i migh seem sensible o go ahead. Bu wha if we wai unil nex year? Then we would decide o inves only if he price goes up. If he price falls, i would make no sense o inves. The NPV in his case is given by: È NPV = (0.5) È Â = 0.5 Î Í + = = $773 Í Î 1.1 (1+ 0.1) = So if we wai a year before deciding wheher o inves in he facory, he projec NPV oday is $773. Clearly i is beer o wai han o inves righ away. If we had no choice, and eiher had o inves now or never, we would obviously choose o inves, since his would have a posiive NPV of $600. Bu he flexibiliy o choose o pospone he decision and inves nex year if he marke price is righ is worh somehing. Specifically, i is worh = $173. In oher words, we should be willing o pay up o $173 more for an invesmen opporuniy ha is flexible han one ha only allows us he choice of invesing now or never. This is he value of flexibiliy in his case. Sill anoher way of saying his is ha here is an opporuniy cos of invesing now, raher han waiing. 3/17/04 Nuclear Energy Economics and 11 Example 2 -- Uncerainy over coss We can consider wo differen kinds of cos uncerainy a. Suppose ha I = $1600 oday, bu ha nex year i will increase o $2400 or decrease o $800, each wih a probabiliy of 0.5. (The cause of his uncerainy could be sochasic flucuaions in inpu prices, or regulaory uncerainies.) The ineres rae is again 10% per year Quesion: Should we inves oday or wai o decide unil nex year? As before, if we inves oday he NPV is given by: NPV = Â = = $600 (1 0.1) 0 + If we wai unil nex year, i will be sensible o inves only if he invesmen cos falls o $800, which happens wih a probabiliy of 0.5. In his case he NPV is given by: È -800 È -800 NPV = + Â = 0.5 ÎÍ + = (0.5) Î Í 1.1 = $636 (1 0.1) (1 0.1) so once again i is beer o wai han o inves immediaely. 12 6
7 Example 2 -- cond. a. Suppose, alernaively, ha here are uncerainies over how much i is going o cos o complee he projec ha can only be resolved by acually doing i. You don know for cerain how much i is going o cos unil you complee i. Le s say ha his uncerainy akes he following form: To build he widge facory you firs have o spend $1000, and ha here is a 50% probabiliy ha he facory will hen be complee, and a 50% probabiliy ha you will have o spend anoher $3000 o complee i. Assume ha he widge price remains consan a $, and ha he ineres rae is 10%. A firs blush, he invesmen would make no sense. The expeced cos of he facory is: (3000) = Â = 2 And since he value of he facory = 1.1, we migh conclude ha i makes no NPV = (0.5) Â = + $ =0 =0 sense o proceed. Bu his ignores he addiional informaion ha is generaed by compleing he firs phase of he projec, and ha we can choose o abandon he projec if compleion requires an exra $3000. The rue NPV is: Since he NPV is posiive, one should inves in he firs sage of he projec. 13 7
Chapter Outline CHAPTER
8-0 8-1 Chaper Ouline CHAPTER 8 Sraegy and Analysis in Using Ne Presen Value 8.1 Decision Trees 8.2 Sensiiviy Analysis, Scenario Analysis, and Break-Even Analysis 8.3 Mone Carlo Simulaion 8. Opions 8.5
More informationMacroeconomics. Part 3 Macroeconomics of Financial Markets. Lecture 8 Investment: basic concepts
Macroeconomics Par 3 Macroeconomics of Financial Markes Lecure 8 Invesmen: basic conceps Moivaion General equilibrium Ramsey and OLG models have very simple assumpions ha invesmen ino producion capial
More informationCHAPTER CHAPTER18. Openness in Goods. and Financial Markets. Openness in Goods, and Financial Markets. Openness in Goods,
Openness in Goods and Financial Markes CHAPTER CHAPTER18 Openness in Goods, and Openness has hree disinc dimensions: 1. Openness in goods markes. Free rade resricions include ariffs and quoas. 2. Openness
More informationCHAPTER 3 How to Calculate Present Values. Answers to Practice Questions
CHAPTER 3 How o Calculae Presen Values Answers o Pracice Quesions. a. PV $00/.0 0 $90.53 b. PV $00/.3 0 $9.46 c. PV $00/.5 5 $ 3.5 d. PV $00/. + $00/. + $00/. 3 $40.8. a. DF + r 0.905 r 0.050 0.50% b.
More informationBond Prices and Interest Rates
Winer erm 1999 Bond rice Handou age 1 of 4 Bond rices and Ineres Raes A bond is an IOU. ha is, a bond is a promise o pay, in he fuure, fixed amouns ha are saed on he bond. he ineres rae ha a bond acually
More informationFINAL EXAM EC26102: MONEY, BANKING AND FINANCIAL MARKETS MAY 11, 2004
FINAL EXAM EC26102: MONEY, BANKING AND FINANCIAL MARKETS MAY 11, 2004 This exam has 50 quesions on 14 pages. Before you begin, please check o make sure ha your copy has all 50 quesions and all 14 pages.
More informationLecture: Autonomous Financing and Financing Based on Market Values I
Lecure: Auonomous Financing and Financing Based on Marke Values I Luz Kruschwiz & Andreas Löffler Discouned Cash Flow, Secion 2.3, 2.4.1 2.4.3, Ouline 2.3 Auonomous financing 2.4 Financing based on marke
More informationInventory Investment. Investment Decision and Expected Profit. Lecture 5
Invenory Invesmen. Invesmen Decision and Expeced Profi Lecure 5 Invenory Accumulaion 1. Invenory socks 1) Changes in invenory holdings represen an imporan and highly volaile ype of invesmen spending. 2)
More informationINSTITUTE OF ACTUARIES OF INDIA
INSIUE OF ACUARIES OF INDIA EAMINAIONS 23 rd May 2011 Subjec S6 Finance and Invesmen B ime allowed: hree hours (9.45* 13.00 Hrs) oal Marks: 100 INSRUCIONS O HE CANDIDAES 1. Please read he insrucions on
More informationAn Introduction to PAM Based Project Appraisal
Slide 1 An Inroducion o PAM Based Projec Appraisal Sco Pearson Sanford Universiy Sco Pearson is Professor of Agriculural Economics a he Food Research Insiue, Sanford Universiy. He has paricipaed in projecs
More informationTechnological progress breakthrough inventions. Dr hab. Joanna Siwińska-Gorzelak
Technological progress breakhrough invenions Dr hab. Joanna Siwińska-Gorzelak Inroducion Afer The Economis : Solow has shown, ha accumulaion of capial alone canno yield lasing progress. Wha can? Anyhing
More informationDynamic Programming Applications. Capacity Expansion
Dynamic Programming Applicaions Capaciy Expansion Objecives To discuss he Capaciy Expansion Problem To explain and develop recursive equaions for boh backward approach and forward approach To demonsrae
More informationA Simple Method for Consumers to Address Uncertainty When Purchasing Photovoltaics
A Simple Mehod for Consumers o Address Uncerainy When Purchasing Phoovolaics Dr. Thomas E. Hoff Clean Power Research 10 Glen C. Napa, CA 94558 www.clean-power.com Dr. Rober Margolis Naional Renewable Energy
More informationFundamental Basic. Fundamentals. Fundamental PV Principle. Time Value of Money. Fundamental. Chapter 2. How to Calculate Present Values
McGraw-Hill/Irwin Chaper 2 How o Calculae Presen Values Principles of Corporae Finance Tenh Ediion Slides by Mahew Will And Bo Sjö 22 Copyrigh 2 by he McGraw-Hill Companies, Inc. All righs reserved. Fundamenal
More informationSupplement to Chapter 3
Supplemen o Chaper 3 I. Measuring Real GD and Inflaion If here were only one good in he world, anchovies, hen daa and prices would deermine real oupu and inflaion perfecly: GD Q ; GD Q. + + + Then, he
More informationCorporate Finance. Capital budgeting. Standalone risk of capital project
Corporae Finance Capial budgeing Iniial oulay = FCInv + NWCInv Sal afer ax operaing cashflow = 0 + T ( Sal0 B0 ) ( R C)( 1 ax) + ax Ter min al year non opereaing cashflow = Sal T Dep + NWCInv ax ( Sal
More informationChapter 4 Introduction to Valuation: The Time Value of Money
Chaper 4 nroducion o Valuaion: The Time Value of Money A dollar oday is worh more han a dollar omorrow!!! How much more, ha is he quesion. Fuure Value Suppose you have $00 and inves i for year a 0%. How
More informationUnemployment and Phillips curve
Unemploymen and Phillips curve 2 of The Naural Rae of Unemploymen and he Phillips Curve Figure 1 Inflaion versus Unemploymen in he Unied Saes, 1900 o 1960 During he period 1900 o 1960 in he Unied Saes,
More informationIncorporating Risk Preferences into Real Options Models. Murat Isik
Incorporaing Risk Preferences ino Real Opions Models Mura Isik Assisan Professor Agriculural Economics and Rural Sociology Universiy of Idaho 8B Ag Science Building Moscow, ID 83844 Phone: 08-885-714 E-mail:
More informationLabor Cost and Sugarcane Mechanization in Florida: NPV and Real Options Approach
Labor Cos and Sugarcane Mechanizaion in Florida: NPV and Real Opions Approach Nobuyuki Iwai Rober D. Emerson Inernaional Agriculural Trade and Policy Cener Deparmen of Food and Resource Economics Universiy
More informationANSWER ALL QUESTIONS. CHAPTERS 6-9; (Blanchard)
ANSWER ALL QUESTIONS CHAPTERS 6-9; 18-20 (Blanchard) Quesion 1 Discuss in deail he following: a) The sacrifice raio b) Okun s law c) The neuraliy of money d) Bargaining power e) NAIRU f) Wage indexaion
More informationAppendix B: DETAILS ABOUT THE SIMULATION MODEL. contained in lookup tables that are all calculated on an auxiliary spreadsheet.
Appendix B: DETAILS ABOUT THE SIMULATION MODEL The simulaion model is carried ou on one spreadshee and has five modules, four of which are conained in lookup ables ha are all calculaed on an auxiliary
More informationUCLA Department of Economics Fall PhD. Qualifying Exam in Macroeconomic Theory
UCLA Deparmen of Economics Fall 2016 PhD. Qualifying Exam in Macroeconomic Theory Insrucions: This exam consiss of hree pars, and you are o complee each par. Answer each par in a separae bluebook. All
More informationt=1 C t e δt, and the tc t v t i t=1 C t (1 + i) t = n tc t (1 + i) t C t (1 + i) t = C t vi
Exam 4 is Th. April 24. You are allowed 13 shees of noes and a calculaor. ch. 7: 137) Unless old oherwise, duraion refers o Macaulay duraion. The duraion of a single cashflow is he ime remaining unil mauriy,
More informationA Decision Model for Investment Timing Using Real Options Approach
A Decision Model for Invesmen Timing Using Real Opions Approach Jae-Han Lee, Jae-Hyeon Ahn Graduae School of Managemen, KAIST 207-43, Cheongrangri-Dong, Dongdaemun-Ku, Seoul, Korea ABSTRACT Real opions
More informationEconomics 301 Fall Name. Answer all questions. Each sub-question is worth 7 points (except 4d).
Name Answer all quesions. Each sub-quesion is worh 7 poins (excep 4d). 1. (42 ps) The informaion below describes he curren sae of a growing closed economy. Producion funcion: α 1 Y = K ( Q N ) α Producion
More informationNOTE ON ECONOMIC PROFIT 1
Deparmen of Managerial Economics and Decision Sciences NOTE ON ECONOMIC PROFIT 1 In judging he success of a business enerprise, one almos always sars wih he quesion: How profiable is he business and is
More informationEconomic Growth Continued: From Solow to Ramsey
Economic Growh Coninued: From Solow o Ramsey J. Bradford DeLong May 2008 Choosing a Naional Savings Rae Wha can we say abou economic policy and long-run growh? To keep maers simple, le us assume ha he
More informationMacroeconomics II A dynamic approach to short run economic fluctuations. The DAD/DAS model.
Macroeconomics II A dynamic approach o shor run economic flucuaions. The DAD/DAS model. Par 2. The demand side of he model he dynamic aggregae demand (DAD) Inflaion and dynamics in he shor run So far,
More information(1 + Nominal Yield) = (1 + Real Yield) (1 + Expected Inflation Rate) (1 + Inflation Risk Premium)
5. Inflaion-linked bonds Inflaion is an economic erm ha describes he general rise in prices of goods and services. As prices rise, a uni of money can buy less goods and services. Hence, inflaion is an
More informationLi Gan Guan Gong Michael Hurd. April, 2006
Ne Inergeneraional Transfers from an Increase in Social Securiy Benefis Li Gan Guan Gong Michael Hurd April, 2006 ABSTRACT When he age of deah is uncerain, individuals will leave bequess even if hey have
More informationCURRENCY CHOICES IN VALUATION AND THE INTEREST PARITY AND PURCHASING POWER PARITY THEORIES DR. GUILLERMO L. DUMRAUF
CURRENCY CHOICES IN VALUATION AN THE INTEREST PARITY AN PURCHASING POWER PARITY THEORIES R. GUILLERMO L. UMRAUF TO VALUE THE INVESTMENT IN THE OMESTIC OR FOREIGN CURRENCY? Valuing an invesmen or an acquisiion
More informationAPRA Research Methodology for Analysis of Superannuation Funds
Curren Research Quesions APRA Research Mehodology for Analysis of Superannuaion Funds Wha are he deerminans of he cross-secional variaion in superannuaion reurns? Asse allocaion, manager skill, expenses/axes
More informationYou should turn in (at least) FOUR bluebooks, one (or more, if needed) bluebook(s) for each question.
UCLA Deparmen of Economics Spring 05 PhD. Qualifying Exam in Macroeconomic Theory Insrucions: This exam consiss of hree pars, and each par is worh 0 poins. Pars and have one quesion each, and Par 3 has
More informationFinancial Econometrics (FinMetrics02) Returns, Yields, Compounding, and Horizon
Financial Economerics FinMerics02) Reurns, Yields, Compounding, and Horizon Nelson Mark Universiy of Nore Dame Fall 2017 Augus 30, 2017 1 Conceps o cover Yields o mauriy) Holding period) reurns Compounding
More informationECO 301 MACROECONOMIC THEORY UNIVERSITY OF MIAMI DEPARTMENT OF ECONOMICS PRACTICE FINAL EXAM Instructor: Dr. S. Nuray Akin
ECO 301 MACROECONOMIC THEORY UNIVERSITY OF MIAMI DEPARTMENT OF ECONOMICS PRACTICE FINAL EXAM Insrucor: Dr. S. Nuray Akin Name: ID: Insrucions: This exam consiss of 12 pages; please check your examinaion
More informationProblem 1 / 25 Problem 2 / 25 Problem 3 / 30 Problem 4 / 20 TOTAL / 100
Deparmen of Economics Universiy of Maryland Economics 325 Inermediae Macroeconomic Analysis Final Exam Professor Sanjay Chugh Spring 2009 May 16, 2009 NAME: TA S NAME: The Exam has a oal of four (4) problems
More informationObjectives for Exponential Functions Activity
Objecives for Recognize siuaions having a consan percen change as exponenial Creae an exponenial model given wo poins Creae and inerpre an exponenial model in a conex Compound ineres problems Perform exponenial
More informationINSTITUTE OF ACTUARIES OF INDIA
INSTITUTE OF ACTUARIES OF INDIA EXAMINATIONS 05 h November 007 Subjec CT8 Financial Economics Time allowed: Three Hours (14.30 17.30 Hrs) Toal Marks: 100 INSTRUCTIONS TO THE CANDIDATES 1) Do no wrie your
More informationProblem Set 1 Answers. a. The computer is a final good produced and sold in Hence, 2006 GDP increases by $2,000.
Social Analysis 10 Spring 2006 Problem Se 1 Answers Quesion 1 a. The compuer is a final good produced and sold in 2006. Hence, 2006 GDP increases by $2,000. b. The bread is a final good sold in 2006. 2006
More informationMathematical methods for finance (preparatory course) Simple numerical examples on bond basics
Mahemaical mehods for finance (preparaory course) Simple numerical examples on bond basics . Yield o mauriy for a zero coupon bond = 99.45 = 92 days (=0.252 yrs) Face value = 00 r 365 00 00 92 99.45 2.22%
More informationExponential Functions Last update: February 2008
Eponenial Funcions Las updae: February 2008 Secion 1: Percen Growh and Decay Any quaniy ha increases or decreases by a consan percenage is said o change eponenially. Le's look a a few eamples o undersand
More information(a) Assume that the entrepreneur is willing to undertake the project, and analyze the problem from the point of view of the outside investor.
Problem Se # Soluions Course 4.454 Macro IV TA: Todd Gormley, gormley@mi.edu Disribued: November 9, 004 Due: Tuesday, November 3, 004 [in class]. Financial Consrains (via Cosly Sae Verificaion) Consider
More informationInternational Capital Budgeting
INERNAIONAL FINANCIAL MANAGEMEN Sevenh Eiion EUN / RESNICK 8- Copyrigh 25 by he McGraw-Hill Companies, Inc. All righs reserve. Copyrigh 27 by he McGraw-Hill Companies, Inc. All righs reserve. Inernaional
More informationReal Options in Dynamic Pricing and Revenue Management
Real Opions in Dynamic ricing and Revenue Managemen Chris Anderson Ivey School of Business, Univ. of Wesern Onario London, Onario, Canada canderson@ivey.ca Real Opions and Dynamic ricing 1 Agenda Financial
More informationVERIFICATION OF ECONOMIC EFFICIENCY OF LIGNITE DEPOSIT DEVELOPMENT USING THE SENSITIVITY ANALYSIS
1 Beaa TRZASKUŚ-ŻAK 1, Kazimierz CZOPEK 2 MG 3 1 Trzaskuś-Żak Beaa PhD. (corresponding auhor) AGH Universiy of Science and Technology Faculy of Mining and Geoengineering Al. Mickiewicza 30, 30-59 Krakow,
More information2. Quantity and price measures in macroeconomic statistics 2.1. Long-run deflation? As typical price indexes, Figure 2-1 depicts the GDP deflator,
1 2. Quaniy and price measures in macroeconomic saisics 2.1. Long-run deflaion? As ypical price indexes, Figure 2-1 depics he GD deflaor, he Consumer rice ndex (C), and he Corporae Goods rice ndex (CG)
More informationThe Mathematics Of Stock Option Valuation - Part Four Deriving The Black-Scholes Model Via Partial Differential Equations
The Mahemaics Of Sock Opion Valuaion - Par Four Deriving The Black-Scholes Model Via Parial Differenial Equaions Gary Schurman, MBE, CFA Ocober 1 In Par One we explained why valuing a call opion as a sand-alone
More informationFinancial Econometrics Jeffrey R. Russell Midterm Winter 2011
Name Financial Economerics Jeffrey R. Russell Miderm Winer 2011 You have 2 hours o complee he exam. Use can use a calculaor. Try o fi all your work in he space provided. If you find you need more space
More informationAssessing Manufacturing Capital Investments in the Global Market
Paper ID #7476 Assessing Manufacuring Capial Invesmens in he Global Marke Dr. Rex C Kanu, Ball Sae Universiy Dr. Rex Kanu is he coordinaor of he manufacuring engineering echnology program in he Deparmen
More informationa. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must i and P be?
Problem Se 4 ECN 101 Inermediae Macroeconomics SOLUTIONS Numerical Quesions 1. Assume ha he demand for real money balance (M/P) is M/P = 0.6-100i, where is naional income and i is he nominal ineres rae.
More informationStylized fact: high cyclical correlation of monetary aggregates and output
SIMPLE DSGE MODELS OF MONEY PART II SEPTEMBER 27, 2011 Inroducion BUSINESS CYCLE IMPLICATIONS OF MONEY Sylized fac: high cyclical correlaion of moneary aggregaes and oupu Convenional Keynesian view: nominal
More informationMacroeconomics II THE AD-AS MODEL. A Road Map
Macroeconomics II Class 4 THE AD-AS MODEL Class 8 A Road Map THE AD-AS MODEL: MICROFOUNDATIONS 1. Aggregae Supply 1.1 The Long-Run AS Curve 1.2 rice and Wage Sickiness 2.1 Aggregae Demand 2.2 Equilibrium
More informationECONOMIC GROWTH. Student Assessment. Macroeconomics II. Class 1
Suden Assessmen You will be graded on he basis of In-class aciviies (quizzes worh 30 poins) which can be replaced wih he number of marks from he regular uorial IF i is >=30 (capped a 30, i.e. marks from
More informationCHRISTOPH MÖHR ABSTRACT
MARKET-CONSISTENT VALUATION OF INSURANCE LIABILITIES BY COST OF CAPITAL BY CHRISTOPH MÖHR ABSTRACT This paper invesigaes marke-consisen valuaion of insurance liabiliies in he conex of Solvency II among
More informationData-Driven Demand Learning and Dynamic Pricing Strategies in Competitive Markets
Daa-Driven Demand Learning and Dynamic Pricing Sraegies in Compeiive Markes Pricing Sraegies & Dynamic Programming Rainer Schlosser, Marin Boissier, Mahias Uflacker Hasso Planer Insiue (EPIC) April 30,
More informationModels of Default Risk
Models of Defaul Risk Models of Defaul Risk 1/29 Inroducion We consider wo general approaches o modelling defaul risk, a risk characerizing almos all xed-income securiies. The srucural approach was developed
More informationFinal Exam Answers Exchange Rate Economics
Kiel Insiu für Welwirhschaf Advanced Sudies in Inernaional Economic Policy Research Spring 2005 Menzie D. Chinn Final Exam Answers Exchange Rae Economics This exam is 1 ½ hours long. Answer all quesions.
More informationChapter 3. Time Value of Money
Chaper 3 Time Value of Money A bird in he hand is worh wo in he bush A folklore saying Learning Oucomes Upon compleion of his chaper, you will be able: 1. To evaluae he significance of he ime value of
More informationCENTRO DE ESTUDIOS MONETARIOS Y FINANCIEROS T. J. KEHOE MACROECONOMICS I WINTER 2011 PROBLEM SET #6
CENTRO DE ESTUDIOS MONETARIOS Y FINANCIEROS T J KEHOE MACROECONOMICS I WINTER PROBLEM SET #6 This quesion requires you o apply he Hodrick-Presco filer o he ime series for macroeconomic variables for he
More informationSingle Premium of Equity-Linked with CRR and CIR Binomial Tree
The 7h SEAMS-UGM Conference 2015 Single Premium of Equiy-Linked wih CRR and CIR Binomial Tree Yunia Wulan Sari 1,a) and Gunardi 2,b) 1,2 Deparmen of Mahemaics, Faculy of Mahemaics and Naural Sciences,
More informationEcon 546 Lecture 4. The Basic New Keynesian Model Michael Devereux January 2011
Econ 546 Lecure 4 The Basic New Keynesian Model Michael Devereux January 20 Road map for his lecure We are evenually going o ge 3 equaions, fully describing he NK model The firs wo are jus he same as before:
More informationForward Contract Hedging with Contingent Portfolio Programming
Forward Conrac Hedging wih Coningen Porfolio Programming Ma-.08 Independen research projecs in applied mahemaics Oso Manninen, 60036T, Tfy s Augus 006 Conens Inroducion... Forward Conracs... 3 3 Coningen
More informationJarrow-Lando-Turnbull model
Jarrow-Lando-urnbull model Characerisics Credi raing dynamics is represened by a Markov chain. Defaul is modelled as he firs ime a coninuous ime Markov chain wih K saes hiing he absorbing sae K defaul
More information12. Exponential growth simulation.
1. Exponenial growh simulaion. Mos people hink of exponenial growh as being growh ha is very fas. However, exponenial growh has a precise meaning a populaion grows exponenially when is growh rae is proporional
More informationOrigins of currency swaps
Origins of currency swaps Currency swaps originally were developed by banks in he UK o help large cliens circumven UK exchange conrols in he 1970s. UK companies were required o pay an exchange equalizaion
More informationINSTITUTE OF ACTUARIES OF INDIA
INSTITUTE OF ACTUARIES OF INDIA EXAMINATIONS 9 h November 2010 Subjec CT6 Saisical Mehods Time allowed: Three Hours (10.00 13.00 Hrs.) Toal Marks: 100 INSTRUCTIONS TO THE CANDIDATES 1. Please read he insrucions
More informationIntroduction. Enterprises and background. chapter
NACE: High-Growh Inroducion Enerprises and background 18 chaper High-Growh Enerprises 8 8.1 Definiion A variey of approaches can be considered as providing he basis for defining high-growh enerprises.
More informationa) No constraints on import- export, no limit on reservoir, all water in the first period The monopoly optimisation problem is:
Monopoly and rade Monopoly conrol impors, bu akes expor price as given. a No consrains on impor- expor, no limi on reservoir, all waer in he firs period he monopoly opimisaion problem is: Max p ( x x +
More informationREGULATION: UNCERTAINTY AND OTHER ISSUES
RGULATION: UNCRTAINTY AND OTHR ISSUS I Taxes and permis wih uncerainy We saw in he previous noes ha axes and radeable permis are idenical, excep ha he governmen may allocae he iniial permis and herefore
More informationMacroeconomics. Typical macro questions (I) Typical macro questions (II) Methodology of macroeconomics. Tasks carried out by macroeconomists
Macroeconomics Macroeconomics is he area of economics ha sudies he overall economic aciviy in a counry or region by means of indicaors of ha aciviy. There is no essenial divide beween micro and macroeconomics,
More informationSession IX: Special topics
Session IX: Special opics 2. Subnaional populaion projecions 10 March 2016 Cheryl Sawyer, Lina Bassarsky Populaion Esimaes and Projecions Secion www.unpopulaion.org Maerials adaped from Unied Naions Naional
More informationAggregate Demand Aggregate Supply 1 Y. f P
ublic Aairs 974 Menzie D. Chinn Fall 202 Social Sciences 748 Universiy o Wisconsin-Madison Aggregae Demand Aggregae Supply. The Basic Model wih Expeced Inlaion Se o Zero Consider he hillips curve relaionship:
More informationMay 2007 Exam MFE Solutions 1. Answer = (B)
May 007 Exam MFE Soluions. Answer = (B) Le D = he quarerly dividend. Using formula (9.), pu-call pariy adjused for deerminisic dividends, we have 0.0 0.05 0.03 4.50 =.45 + 5.00 D e D e 50 e = 54.45 D (
More informationChapter 8 Consumption and Portfolio Choice under Uncertainty
George Alogoskoufis, Dynamic Macroeconomic Theory, 2015 Chaper 8 Consumpion and Porfolio Choice under Uncerainy In his chaper we examine dynamic models of consumer choice under uncerainy. We coninue, as
More informationEVA NOPAT Capital charges ( = WACC * Invested Capital) = EVA [1 P] each
VBM Soluion skech SS 2012: Noe: This is a soluion skech, no a complee soluion. Disribuion of poins is no binding for he correcor. 1 EVA, free cash flow, and financial raios (45) 1.1 EVA wihou adjusmens
More informationAn Alternative Real Option Approach to R&D Project Assessment
Asia Pacific Managemen Review 14(1) (2009) 1-13 Absrac An Alernaive Real Opion Approach o R&D Projec Assessmen Her-Jiun Sheu a, Lieh-Ming Luo b,* a Deparmen of Finance, Naional Chi Nan Universiy, Taiwan
More informationChapter 10: The Determinants of Dividend Policy
Chaper 10: The Deerminans of Dividend Policy 1. True True False 2. This means ha firms generally prefer no o change dividends, paricularly downwards. One explanaion for his is he clienele hypohesis. Tha
More informationTable of contents Yield to maturity between two coupon payment dates Influences on the yield to maturity: the coupon effect...
able of conens. ime value of money. ime value of money..... Simple versus compound ineres..... Presen and fuure value.....3 Annuiies... 3..4 Coninuous discouning and compounding... 4. Bond yield measures...
More informationForecasting with Judgment
Forecasing wih Judgmen Simone Manganelli DG-Research European Cenral Bank Frankfur am Main, German) Disclaimer: he views expressed in his paper are our own and do no necessaril reflec he views of he ECB
More informationValuing Real Options on Oil & Gas Exploration & Production Projects
Valuing Real Opions on Oil & Gas Exploraion & Producion Projecs March 2, 2006 Hideaka (Hugh) Nakaoka Former CIO & CCO of Iochu Oil Exploraion Co., Ld. Universiy of Tsukuba 1 Overview 1. Inroducion 2. Wha
More information1. To express the production function in terms of output per worker and capital per worker, divide by N: K f N
THE LOG RU Exercise 8 The Solow Model Suppose an economy is characerized by he aggregae producion funcion / /, where is aggregae oupu, is capial and is employmen. Suppose furher ha aggregae saving is proporional
More informationEconomics 602 Macroeconomic Theory and Policy Problem Set 9 Professor Sanjay Chugh Spring 2012
Deparmen of Applied Economics Johns Hopkins Universiy Economics 602 Macroeconomic Theory and Policy Prolem Se 9 Professor Sanjay Chugh Spring 2012 1. Sock, Bonds, Bills, and he Financial Acceleraor. In
More informationSpring 2011 Social Sciences 7418 University of Wisconsin-Madison
Economics 32, Sec. 1 Menzie D. Chinn Spring 211 Social Sciences 7418 Universiy of Wisconsin-Madison Noes for Econ 32-1 FALL 21 Miderm 1 Exam The Fall 21 Econ 32-1 course used Hall and Papell, Macroeconomics
More informationSupplement to Models for Quantifying Risk, 5 th Edition Cunningham, Herzog, and London
Supplemen o Models for Quanifying Risk, 5 h Ediion Cunningham, Herzog, and London We have received inpu ha our ex is no always clear abou he disincion beween a full gross premium and an expense augmened
More informationChapter 4 The Time Value of Money and Discounted Cash Flow Analysis
Chaper 4 The Time Value of Money and Disouned Cash Flow nalysis 4.5 Muliple Cash Flows Suppose ha an invesmen plan has muliple ash inflows as follows. Cash inflows are $,000 a year from now and $2,000
More informationA pricing model for the Guaranteed Lifelong Withdrawal Benefit Option
A pricing model for he Guaraneed Lifelong Wihdrawal Benefi Opion Gabriella Piscopo Universià degli sudi di Napoli Federico II Diparimeno di Maemaica e Saisica Index Main References Survey of he Variable
More informationEstimating subregional and regional growth for developing Asia
Esimaing subregional and regional growh for develoing Asia In esimaing subregional (e.g., Eas Asia) and regional (i.e., develoing Asia) gross domesic roduc (GDP) growh, i is necessary o use weighs o roerly
More informationMa 093 and MA 117A - Exponential Models. Topic 1 Compound Interest
Ma 093 and MA 117A - Eponenial Models Topic 1 Compound Ineres 15) Compound Ineres A person invess $7000 a 10% ineres compounded annuall. a) Find an equaion for he value of he invesmen afer ears. = a* b
More informationThursday July 23, 2009 MS&E247s International Investments Handout #13 Page 1 of 16
MS&E247s Inernaional Invesmens Handou #13 Page 1 of 16 Reading Assignmens for his Week TTh 3:15-4:30 Gaes B01 Thursday, July 23, 2009 Final Exam MS&E 247S Fri Aug 14 2009 12:15PM-3:15PM Gaes B01 Or Saurday
More informationIssues in the Measurement of Capital Services, Depreciation, Asset Price Changes and Interest Rates
1 Issues in he Measuremen of Capial Services, Depreciaion, Asse Price Changes and Ineres Raes W. Erwin Diewer, Discussion Paper 04-11, Deparmen of Economics, Universiy of Briish Columbia, Vancouver, B.C.,
More informationPrinciples of Finance CONTENTS
Principles of Finance CONENS Value of Bonds and Equiy... 3 Feaures of bonds... 3 Characerisics... 3 Socks and he sock marke... 4 Definiions:... 4 Valuing equiies... 4 Ne reurn... 4 idend discoun model...
More informationA Note on Missing Data Effects on the Hausman (1978) Simultaneity Test:
A Noe on Missing Daa Effecs on he Hausman (978) Simulaneiy Tes: Some Mone Carlo Resuls. Dikaios Tserkezos and Konsaninos P. Tsagarakis Deparmen of Economics, Universiy of Cree, Universiy Campus, 7400,
More informationOptimal Tax-Timing and Asset Allocation when Tax Rebates on Capital Losses are Limited
Opimal Tax-Timing and Asse Allocaion when Tax Rebaes on Capial Losses are Limied Marcel Marekwica This version: January 15, 2007 Absrac Since Consaninides (1983) i is well known ha in a marke where capial
More informationShort Course. Rong Chen Rutgers University Peking University
Shor Course Sae Space Models, Generalized Dynamic Sysems and Sequenial Mone Carlo Mehods, and heir applicaions in Engineering, Bioinformaics and Finance Rong Chen Rugers Universiy Peking Universiy 1 Par
More informationCHAPTER CHAPTER26. Fiscal Policy: A Summing Up. Prepared by: Fernando Quijano and Yvonn Quijano
Fiscal Policy: A Summing Up Prepared by: Fernando Quijano and vonn Quijano CHAPTER CHAPTER26 2006 Prenice Hall usiness Publishing Macroeconomics, 4/e Olivier lanchard Chaper 26: Fiscal Policy: A Summing
More informationAn enduring question in macroeconomics: does monetary policy have any important effects on the real (i.e, real GDP, consumption, etc) economy?
ONETARY OLICY IN THE INFINITE-ERIOD ECONOY: SHORT-RUN EFFECTS NOVEBER 6, 20 oneary olicy Analysis: Shor-Run Effecs IS ONETARY OLICY NEUTRAL? An enduring quesion in macroeconomics: does moneary policy have
More informationSuggested Template for Rolling Schemes for inclusion in the future price regulation of Dublin Airport
Suggesed Templae for Rolling Schemes for inclusion in he fuure price regulaion of Dublin Airpor. In line wih sandard inernaional regulaory pracice, he regime operaed since 00 by he Commission fixes in
More informationLIDSTONE IN THE CONTINUOUS CASE by. Ragnar Norberg
LIDSTONE IN THE CONTINUOUS CASE by Ragnar Norberg Absrac A generalized version of he classical Lidsone heorem, which deals wih he dependency of reserves on echnical basis and conrac erms, is proved in
More informationRoger Mercken 1, Lisette Motmans 2, Ghislain Houben Call options in a nutshell
No more replicaing porfolios : a simple convex combinaion o undersand he ris-neural valuaion mehod for he muli-sep binomial valuaion of a call opion Roger Mercen, Lisee Momans, Ghislain Houben 3 Hassel
More information