B.05.Panning

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Author:
Exam9_2012
ID:
137208
Filename:
B.05.Panning
Updated:
2012-05-09 16:58:36
Tags:
Franchise
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Description:
Managing Interest Rate Risk
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  1. Franchise value
    • economic value of profits that will be earned in the future years from the future renewals of the current policies
    • reflected in a firm's stock price
    • based on PV of future CF -> subject to int rate risk
    • usually invisible to senior execs -> unmanaged
  2. Calculations of franchise value
    • y = rf, k = target ros, C = current econ value
  3. Interest rate sensitivity of F
    • k = a + by
    • most cpies use b = 0
    • D = (a - b + 1) / [(1 + y)(a + by - y)] + 1 / [1 + y - cr]
  4. Franchise value dilemmas
    • as F incr, more diff to manage int rate risk
    • if reduce D of assets, might puzzle regulators
    • should use pricing strategy k = a + by
    • (-) desired combination can only be maitained for small rate chg

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