Abstract
In Chap. 3 the market risk of an investment was studied from a one-dimensional perspective, that is, considering only two points in time: the moment when the investment is made, which involves buying a portfolio of shares, and the time at which its value is measured. The same concept can be used to study other types of investment when it is necessary to evaluate what will happen at various points in time after the investment has been made. For example, it could be used by a company that has the opportunity to carry out an investment project that will provide some payments, or cash flows (CF), over time but the amount to be obtained is uncertain. This is the case with any business project—opening a restaurant, building a factory, working a mine and so on—and the value of the project today depends on the expectations of these cash flows. This project value is known as “net present value” (NPV).
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Notes
- 1.
There are many manuals; Hamilton’s book (1994) can be highlighted as a recommendation.
- 2.
Even though they are known as autoregressive processes, those presented in this book are first-order autoregressive processes. In order to avoid lengthening the explanations unnecessarily, the other autoregressive processes are not mentioned.
- 3.
Even though they are known as moving average processes, this book only deals with moving average processes of the first order. In order to avoid extending this section unnecessarily, the remaining moving average processes do not feature here.
- 4.
As will be shown in subsequent chapters, the dynamics of commodity prices are more complex than a simple autoregressive process. However, for simplicity, this example will maintain this assumption.
- 5.
For simplicity we will assume that in all cases the same number of barrels is obtained, but the problem would be equally easy to solve if the number of barrels obtained on each date was different, as long as these values were known and not random variables.
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García, F.J.P. (2017). Multidimensional Market Risk. In: Financial Risk Management. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-41366-2_4
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DOI: https://doi.org/10.1007/978-3-319-41366-2_4
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