I havent used matlab in many years.(adsbygoogle = window.adsbygoogle || []).push({});

I have been trying to estimate the value

of a financial contract my bank is selling.

It would be great if someone has the time to read it through and check

if i have made any mistakes.

***********************************

Its price today is 95.1 and it expires in 5 years and you can

sell it back to the bank at at least a 100 at expiration.

100 was the starting price for the contract.

You can also buy and sell the contract on the market at any time.

You get a rate of return of 1.953% on your investment each quarter.

The contract is for a specific company and if this company has

a credit event you get back between 0 and 40% of your investment.

I assumed a uniform distribution between 0 and 40%.

From my data i have estimated the probability of a credit event

in any quarter to be 0.0031578.

I also assumed the credit events happen at end of a quarter.

Today you buy the contract at a 4.9% discount which you get back at

the expiration date.

******************************************

clear

format long

PCEQ = 0.0031578; % Probability of a Credit Event for a given Quarter

PNoCEQ = 1-PCEQ;

NOC = 10000; % Minimum Number Of Contracts

Price = 95.1; % Price per contract

Inv = Price*NOC; % Total investment

RoRQ = 1.019351; % Rate of Return for each Quarter

Q = 5*4; % Number of Quarters to expiration

spread = 0.2*NOC;

value(1)=Inv-spread;

for j=1:10000

for i=1:Q

r = 0 + (0.4-0).*rand(1,1);

ReturnAtCE = value(1)*r;

% Return At Credit Event is value(1) times

% a random number between 0 and 0.4 from a uniform PD.

value(i+1) = value(1)*RoRQ^(i)*PNoCEQ^(i)+(ReturnAtCE+value(1)*RoRQ^(i)-value(1))*(1-PNoCEQ^(i));

% Value of investment after each quarter

% I assume the credit events happens at the end of each quarter so you get

% a return of ReturnAtCE + the rate of return for the number of

% quarters since the start

end

value(Q+1)=value(Q+1)+4.9*NOC;

% Today you buy the contract at a 4.9% discount which you get back at

% expiration

value1(j,1:(Q+1)) = value;

% Because i picked random numbers from a uniform PD i calculate

% the values 10000 times and then on line 56-60 i take the average.

end

for m=1:(Q+1)

value2(m) = sum(value1(:,m));

end

value2 = value2/10000

commision = 59*2;

value2 = value2 - commision;

format short

Investment=Inv

Value12Quarters = value2(13)

Value20Quarters = value2(Q+1)

PercentChange12Q=1+(Value12Quarters-Inv)/Inv;

PercentChange20Q=1+(Value20Quarters-Inv)/Inv;

AnnualReturnPercentAfter12Q = 100*(nthroot(PercentChange12Q, 3)-1)

AnnualReturnPercentAfter20QExpiration = 100*(nthroot(PercentChange20Q, 5)-1)

*****************************

Investment =

951000

Value12Quarters =

1.1660e+06

Value20Quarters =

1.3947e+06

AnnualReturnPercentAfter12Q =

7.0302

AnnualReturnPercentAfter20QExpiration =

7.9592

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# Financial contract

Can you offer guidance or do you also need help?

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