Scenario based techniques for quantifying abolute dollar

[Soccerboy]

..gain or loss exposure to changes in interest rates (by CIA)

This note baffles me, the list is starting to stick but Im still at loss as to what they are getting at:

I know the three methods are

Discounted CF
Market Value
Accumulated value


Here is what I think they are saying:

Accumulated value, : just accumulate the cash flows to the date of reset to market rates (in confused, why market rates), making sure you model various scenarios, inclde embeded options, investment expenses and defaults

Market Value:Seperate out liquid and illiquid assets, but I dont know what else you are trying to acomplish here


Discounted cash flow, i dont know why this applies to people with stable investment and the accumulated value doesn't

can someone please give me a quick lowdown on what scenario based technique is trying to do?

[chick]

these are techniques used to quantify the amount of interest rate risk exposure... sorta like stress testing to see how exposed a company is to interest rate changes.

[torrent]

Other references in the syllabus.

"Full valuation approach" ch5 HFIS
"Total-return models" ch47 HFIS

These techniques are more complex than immunization and dedication, as they require stochastic simulation of many scenarios.

[Soccerboy]

Following up from this question I asked a while back....

1. On Accumulated Cash flow technique, we are supposed to accumulate cash flows. Where are we at this point in time..
a) Are we accumulating past cash flows till today? or
b) are we projecting cash flows and accumulating to a future date when Asset and liability mature (and they are reset to Market value),
If b, what interest rate do we use here?..Im trying to get prepared in case we are thrown a numerical question on this one

2. We are also told that we model options, expenses, various scenarios as well, got that..now we are also told that we adjust current assets (current as of when) if that asset does not reflect long term investment strategy..What does this mean.."reflect long term investment strategy", how do we measure this

I think a lot of thses questions can be answered if I know where we are now and when is the projection period

3. Why is discounted CF technique good for dynamically managed C3 risk, is this because you project cash flows then discount them back using various techniques available to you?

4.Under Market Value technique, we calculate PV of assets at spot rates replicating the portfolio and for illiquid assets/liabilities, we use current spot rates..can someone tell me the difference between current spot rate and spot rate replicating the asset portfolio

thanks

[ssb]

4.Under Market Value technique, we calculate PV of assets at spot rates replicating the portfolio and for illiquid assets/liabilities, we use current spot rates..can someone tell me the difference between current spot rate and spot rate replicating the asset portfolio

thanks

Trying to help on #4, the current spot curve to discount illiquid assets/liabilities is derived from conservative fixed income yield. It sounds like some conservative assumptions. And the spot rates to calculate the PV of liquid assets are just the rates to replicate the market value. One question is that, why we bother to figure out these spot rates rather than just using the market value. My answer is that we need to build a spot rate curve for us to shock.

I also look forward to any help on #1-3.