Testing for Convexity Relevance: An IFRS 9 Benchmark Cashflow Test Proposal
23 Pages Posted: 17 May 2017 Last revised: 24 May 2017
Date Written: May 15, 2017
According to IFRS 9, an Entity shall assess – by performing a quantitative assessment – the relevance of the modification of the time value of money element, i.e. the modification of the interest that can be observed, e.g. in all the instruments whose underlying interest rate tenors are different from the instrument payment tenors, i.e. the instruments affected by convexity.
The aim of this paper is to introduce and describe a test that can be used to assess whether the magnitude of this modification is actually relevant. If this is the case, the instrument under investigation cannot be measured at Amortised Cost or Fair Value Through Other Comprehensive Income but it must be measured at Fair Value Through Profit or Loss.
Keywords: IFRS 9, Benchmark Cashflow Test, Amortised Cost, Fair Value through Other Comprehensive Income, Fair Value through Profit or Loss, Convexity, Libor-In-Arrears Floaters, CMS, Displaced Diffusion Libor Market Model, Gaussian Copula
JEL Classification: C12, C15, C63, G12, G13, M41
Suggested Citation: Suggested Citation