Testing for Convexity Relevance: An IFRS 9 Benchmark Cashflow Test Proposal

23 Pages Posted: 17 May 2017 Last revised: 24 May 2017

See all articles by Luigi A. Cefis

Luigi A. Cefis

Intesa SanPaolo SpA - Financial and Market Risk Management Department

Date Written: May 15, 2017

Abstract

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

Cefis, Luigi A., Testing for Convexity Relevance: An IFRS 9 Benchmark Cashflow Test Proposal (May 15, 2017). Available at SSRN: https://ssrn.com/abstract=2969122 or http://dx.doi.org/10.2139/ssrn.2969122

Luigi A. Cefis (Contact Author)

Intesa SanPaolo SpA - Financial and Market Risk Management Department ( email )

Milan
Italy

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