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Unified Financial Analysis: Value and Income Valuation

Explore different valuation methods and the role of bookkeeping in financial analysis. Learn about market vs. book value, fair value, NPV, and other key concepts in finance. Discover the importance of accurate valuation for investments and financial decision-making.

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Unified Financial Analysis: Value and Income Valuation

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  1. Unified Financial Analysis Risk & Finance Lab Chapter 9: Value and Income Willi Brammertz / Ioannis Akkizidis

  2. Value and income

  3. ValuationWhy can value differ? Different views on market evolution Different book keeping methods

  4. On value • What is book value? • Difference between market and book value? • Tension between • Book keepers and rocket scientists • Actuaries and asset managers • The special role of fair value / NPV • Parallel valuation

  5. Parallel Valuation • Must be possible • Note: • There is a single set of events • All values derive from the same set of events • Full consitency between different valuation methods

  6. Parallel valuation • Cash flows and events are independent of valuation • Only the traject of P/D(ß) changes • Many P/D(ß) can be calculated and stored in parallel

  7. Overview

  8. OverviewTime dependent

  9. OverviewMarket dependent

  10. Book keeping and Chart of account • Is a chart of account neccesary for book keeping? • Chart of account: Representation of a product catalogue • What is the role of the chart of account • In static analysis • In dynamic analysis • Value and chart of accounts

  11. Value and incomeScientific bookkeeping

  12. Scientific book keeping • The different bookkeeping methods βare only concerned with the calculation of • P/D(ß) • ΔP/D(ß)

  13. Nominal value } =0

  14. The big four • Nominal value • Historic value • Amortized Cost • Market value (primus inter pares)

  15. Nominal value, write off at beginning

  16. Amortized cost mustbe a constant This is the case under the following condition

  17. Amortized cost

  18. Historic value / write off at end

  19. Mark to market / fair value

  20. Market value / mark to market / fair value and NPV • Observed market value is without accruals • Fair value ≈ mathematically calculated value of non traded positions assuming similar conditions • NPV is fair value including accruals • Accruals: difference between market and arbitrage free NPV

  21. Other book keeping methods in the financial sector • Linear • To maturity • To repricing • Lower of cost or market • Minimum value principle

  22. Linear write off If rate resets: write off usually till next rate reset point

  23. Lower of cost or market

  24. Minimal value

  25. What is „Expected Cash-Flow“ based value? • Compatible with IFRS? • Alternative to fair value? • Trick of regulators? • Hidden present for the „too big to fail“ banks • Valuation on a risk neutral or near rick neutral basis • Excludes the propper risk premium

  26. FX • Only 2 rules (Φ) • Mark to market • Historic value

  27. Impairment • Impairment: Credit risk (*) related value reductions

  28. Operational: P&L and capitalization

  29. Operational: Investments • What makes investments (and P&L effects) so different? • Different methods of writing off • Linear • Geometric • Sum of digits

  30. IFRS 32, 39 • Allowed Book keeping methods • Nominal • (Historic) • Amortized cost • Fair value / Market value • Critique on fair value book keeping

  31. IFRS 32, 39: Hedge AccountingDesignation and de-designation

  32. IFRS 32, 39: Hedge testingEx ante, ex post

  33. Funds Transfer Pricing (FTP)Profit Centers

  34. Profitability of a single financial transaction: Interest Income (Expense) ./. Transfer Expense (Income) = Gross Income (Deckungsbeitrag I, Net Contribution I) ./. Cost of the transaction (Salaries, paper etc.) = Net Income (Deckungsbeitrag II, Net Contribution II) Cost of transaction: See chapter 7 (Activity Based Cost Allocation) FTP and profitability

  35. FTP, cost accounting and contributionanalysis NII(ti-ti+1) , Allocated Cost(ti-ti+1) Profitability of a Profit-Centre (Product, …) =Sum of Net Income of all transactions belonging to the Profit-centre (Product …)

  36. Integrating risk and return Rate VA σr VL Time tL tA Δ t RISK

  37. FTP and return Interest o Total Margin Y1 5 % • 4.5 % o Term to maturity 6 % o Yield curve o 5.6 % TM 5 1 5

  38. FTP and risk and return Yield curve t1 6 % o Total Margin Y2 Yield curve t0 o o 5.6 % TM o 4 Interest 0 -1 1 Term to maturity

  39. Funds Transfer Pricing (FTP)Margin calculation

  40. The NPV view on FTP

  41. Funds Transfer Pricing (FTP)Non maturity contracts

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