Cash-Flow Map provides functions to weight and map cash flows located between vertices according to popular risk management techniques. This xll extends beyond simplistic RiskMetrics© methodology and illustrates other techniques.
Many Risk Managers still assume correlated mappings are
appropriate. The correlated mapping approach may actually introduce
non-linearity:
when correlation between vertices is low & rates are high.
when the cash flow to be mapped is disproportionately close to one of the vertices.
when the correlation of the Zero Coupon Bond log returns is lower than the absolute ratio between vertex volatility.
The Cash-Flow Mapping XLL holds two types of functions.
The first type holds
the weights allocated to right and left vertices.
| linearWeight | : | Computes Either The Right or Left Vertex Weight Allocation According to the New Mapping Methodology. |
| CorrelatedWeight | : | Computes Either The Right or Left Vertex Weight Allocation According to the correlated Mapping approach. |
OldMapping takes 6 Arguments:
|
Argument |
Description |
|
| Vertex Maturity | : | The Range of Vertex Maturities as a Fraction. (i.e. 0.25 for say 90/360) |
| Yield Volatility | : | The discrete interest rate levels of the vertices tenors as defined in Market Data field. |
| Correlation, | : | The correlation between the vertices. |
| Cash-Flow Maturity | : | The Maturities of the Cash-Flows sought. |
| Return Type | : | Enter either L or LEFT for the Left Vertices or R or RIGHT for the right Vertices. |
| Activation Key | : | Enter 0 for standby mode or 1 for activation. |
NewMapping takes 4 Arguments:
|
Argument |
Description |
|
| Vertex Maturity | : | The Range of Vertex Maturities as a Fraction. (i.e. 0.25 for say 90/360) |
| Cash-Flow Maturity | : | The Maturities of the Cash-Flows sought. |
| Return Type | : | Enter either L or LEFT for the Left Vertices or R or RIGHT for the right Vertices. |
| Activation Key | : | Enter 0 for standby mode or 1 for activation. |
Cash-Flow
Function
OldCFMap takes 9 Arguments:
|
Argument |
Description | ||
| Vertex Maturity | : | The Range of Vertex Maturities as a Fraction. (i.e. 0.25 for say 90/360) | |
| Vertex Rate | : | The Discrete Interest Rate Level of The Vertices as found in Market Data. | |
| Volatility | : | The Discrete Interest Rate Volatility Level of The Vertices as found in Market Data. | |
| Correlation | : | The Correlation between the vertices. | |
| Cash-Flow Maturity | : | The Maturities of the Cash-Flows sought. | |
| Mapped Flow | : | The Cash-Flow Amounts to be Mapped. | |
| Frequency | : | The Frequency of the Interest Rate Curve being Mapped. | |
| Return Type | : | The main values are | |
|
|
LEFT | : Returns the Left Vertices Weights. | |
| RIGHT | : Returns the Right Vertices Weights. | ||
| Other outputs available: | |||
| ZERO | : Returns the Zero Coupon Bond Prices of the Mapped Flows. | ||
| YIELD | : The Yield of the Zero Coupon Bond Mapped. | ||
| FLOW | : The Mapped Flows as documented in the RiskMetrics Technical document | ||
| NOMINAL | : The Mapped Flows in Nominal Terms. The Amount applied to the weighting function is not Discounted Amounts. That is when the cash-flow is split it is split with the nominal amount applicable at that point in time. Many knowledgeable practitioners use it. Makes sense. | ||
| Activate | : | 0=standby.11=active. |
|
NewCFMap takes 7 Arguments:
|
Arguments |
Description | ||
| Vertex Maturity | : | The Range of Vertex Maturities as a Fraction. (i.e. 0.25 for say 90/360) | |
| Vertex Rate | : | The Discrete Interest Rate Level of The Vertices as found in Market Data. | |
| Cash-Flow Maturity | : | The Maturities of the Cash-Flows sought. | |
| Mapped Flow | : | The Cash-Flow Amounts to be Mapped. | |
| Frequency | : | The Frequency of the Interest Rate Curve being Mapped. | |
| Return Type | : | The main values are | |
|
|
LEFT | : Returns the Left Vertices Weights. | |
| RIGHT | : Returns the Right Vertices Weights. | ||
| Other outputs available: | |||
| ZERO | : Returns the Zero Coupon Bond Prices of the Mapped Flows. | ||
| YIELD | : The Yield of the Zero Coupon Bond Mapped. | ||
| FLOW | : The Mapped Flows as documented in the RiskMetrics Technical document. | ||
| Activate | : | 0
=standby. 11 = active. |
|
For those working in secure environments, the code for these two functions is freely available upon demand.
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