He received his doctoral degree from the University of Mü nster and his habilitation from the University of St. Gallen. In 2008, he was Visiting Professor at the University of Wisconsin-Madison. His research interests include risk management, regulation, asset liability management and empirical aspects of finance and insurance. He has published articles in leading journals such as the Journal of Risk and Insurance, the Journal of Banking and Finance and Insurance: Mathematics and Economics. Simone Farinelli holds a PhD in Mathematics from the Swiss Institute of Technology in Zurich (ETHZ) and works as Head of model development and maintenance for UBS Firm-wide Risk Control & Methodology in Zurich. He has previously served as Head of quantitative analysis, senior quantitative analyst and senior fixed income modeler at Zurich Cantonal Bank; as head of financial risk management at Zurich Reinsurance Company; as ALM analyst and product developer in the actuarial department of Winterthur Life Insurance Company. His main research interests include asset liability management, portfolio optimization, term structure modeling and integrated market, credit and country risk.
International Financial Reporting Standards (IFRS) 13 Fair Value Measurement lays down two methods to adjust Expected Present Value (EPV) for risk. According to Method 1, expected cash inflows should be risk-adjusted by subtracting a risk-premium and discounted at the market risk-free rate, see (IFRS 13, B25). In contrast according to Method 2, expected cash inflows should be discounted at the risk-free rate augmented by a risk-premium addendum, see (IFRS 13, B26). Standard IFRS 13, B29 leaves the freedom to choose between the two methods. The aim of this note is to identify the relationship between the Risk-Adjusted EPVs rolled out from Method 1 and Method 2. First we introduce a theoretical solution to risk-adjustments compliant with the Standard IFRS 13, B29. Then, we set up a user-oriented proxy to connect the risk-premium present in Method 1 with the risk-adjusted rate present in Method 2. This proxy spots light on the key role played by the Macaulay Duration of expected inflows, rather than that of the lifetime of the project. As a consequence, projects expiring at the same redemption date and endowed with the same EPV and/or the same total inflow may differ considerably in risk-adjustments, due to different Macaulay Durations. A user-oriented method to properly to fast evaluate risk-adjustments for multi-cash inflow projects is provided. Sensitivity analysis of the impact of the Macaulay Duration on Risk-Adjusted EPV is also rolled out through numerical examples.
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