GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA

GROUP NUMBER: 4755

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TING MEMBER

Neeraj Patidar India [email protected]

Nitiwit Kuldiloke Thailand [email protected]

Aditya Nalluri USA [email protected]

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assignment submitted is original work produced by the group (excluding any non-contributing members
identified with an “X” above).

Team member 1 Neeraj Patidar

Team member 2 Nitiwit Kuldiloke

Team member 3 Aditya Nalluri

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Step 1: Collateral Related Risks

Financing challenges Collateral challenges

Money at a 1. Credit Risk - as there’s no collateral

fixed rate for backing the loan, the lender might not be
an unsecured able to recover the principal/interest in
purchase case the borrower defaults [1]
2. Interest Rate Risk - if market rates
increase and exceed the fixed rate agreed
upon with the borrower then the
profitability will be impacted & might
lead to eventual loss as well X
3. Evaluation of creditworthiness is a key
factor in these kinds of loans and there
can be challenges in evaluating the same
for the borrowers
4. Challenges in effective collections and
recovery processes as there’s no
collateral that can be liquidated to
recover the principal/interest

Money at a 1. Collateral Valuation of the collateral may

floating rate vary as per market conditions & might go
for a secured below the amount that has been loaned
purchase to the borrower and hence introducing
additional risk
2. Collateral Deterioration - Secured
purchases like Homes, and vehicles are
susceptible to natural/man-made
calamities like fire, accidents, etc, and X
hence
3. Market Volatility - may lead to
uncertainty in interest rate, in
high-volatility env it’ll be difficult to
manage risk & frequently update interest
rate
4. Challenges in effective collections and
recovery processes as these collaterals
cannot be easily liquidated to recover the
principal/interest

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Money at a 1. Project Completion Risk: The primary

fixed rate for a collateral for a construction loan is the
business for a project itself. If the construction project
construction faces delays, cost overruns, or is not
loan. completed, the collateral's value is
compromised, posing significant risk to
the lender.
2. Market Value Risk of the Completed
Project: The future market value of the
completed construction project can be
uncertain and affected by various factors
such as real estate market fluctuations,
economic conditions, and changes in X
local demand.
3. Lien Priority Issues: Construction
projects often involve multiple
contractors and suppliers, each of whom
may have the right to place a lien on the
property if they are not paid. This can
complicate the lender's priority claim on
the property as collateral.
4. Regulatory and Zoning Changes:
Changes in local regulations, zoning laws,
or building codes during the construction
process can impact the feasibility or
design of the project, thus affecting the
value and utility of the property as
collateral.

Publicly traded 1. Market Volatility: The value of equities

Equity can fluctuate significantly due to market
volatility, impacting the value of the
collateral.
2. Reinvestment Risk: Aggressive
reinvestment strategies can introduce
hidden risks and conflicts with the
collateral’s role.
3. Operational Complexity: Managing
X collateral, involves tasks such as
monitoring value, adjusting margin calls,
and handling corporate actions which
may lead to errors or delays.
4. Default Risk: if the equities keep
declining, it leaves a borrower at risk of
default.

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Publicly traded 1. Interest Rate Volatility: Fluctuations in

bond interest rates may effectively change the
value of a bond, affecting the value of
the collateral.
2. Creditworthiness: If the issuer’s
creditworthiness deteriorates, the bond’s
price could decrease, affecting the
X collateral value.
3. Operational Complexity: Managing
collateral involves tracking its value,
handling corporate actions [2], and
managing margin calls, which can be
complex and may lead to errors or
delays.
4. Default Risk: If the borrowed securities
and collateral are correlated, concurrent
declines could leave lenders vulnerable
to default.

Collateral 1. Collateral Realization Risk: In the event

Challenges for of a default, the process of liquidating or
Private Equity realizing the value of the illiquid security
can be challenging and time-consuming.
as an Illiquid
2. Market and Economic Sensitivity: The
Security value of private equity investments can
​ be highly sensitive to overall market and
economic conditions, as well as to
specific industry risks. Economic
downturns can significantly devalue
X these investments.
3. Counterparty and Concentration Risks:
Risks associated with the specific
companies or projects in which the
private equity is invested, including the
risk of default or underperformance.
Additionally, there may be a high
concentration of risk if the private equity
is focused in a particular sector or
geographic region.
4. Due Diligence Complexity: The process
of performing due diligence on private
equity as collateral is more complex and
resource-intensive compared to more
liquid assets, which can deter lenders
from accepting it as collateral.

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Step 2: Statistical Related Challenges

Volatility challenges Correlation challenges

Money at a 1. Interest Rate Volatility: Due to volatility 1. Economic Indicators Correlation:

fixed rate for in interest rates, Fixed-rate loans may Correlation challenges may arise
an unsecured become less attractive during periods of when economic indicators, such as
purchase declining interest rates. unemployment rates or GDP growth,
2. Economic Downturns - Changes in correlate with the creditworthiness of
economic conditions can introduce individuals
volatility in the ability of individuals to 2. Consumer Spending Patterns:
meet their financial obligations & hence Correlations with consumer spending
increasing the risk of defaults patterns can affect repayment
3. Re-Payment Volatility: individual behavior, introducing challenges in
re-payment patterns can affect the predicting and managing the cash
predictability of cash flows, making it flows associated with unsecured
challenging to manage risk purchases
4. Volatile Regulatory/Economic Policy 3. Interest Rate Market Correlation:
environments, such as changes in Correlation with fluctuations in the
consumer protection laws or interest rate broader interest rate market can
regulations, can impact the financing impact the financing costs and overall
terms and risk associated with unsecured risk associated with fixed-rate
purchases. unsecured purchases.

Money at a 1. Interest Rate Volatility - Unpredictable 1. Correlation of interest rates and

floating rate movements in interest rates impacting housing defaults – as interest rates
for a secured borrowing costs and investment returns. increase, the borrower has to pay
purchase 2. Property Value Fluctuations: Volatility in higher amounts each month, making
the real estate market can impact the it more difficult to meet the
value of the collateral (home or payments.
automobile), introducing uncertainty in 2. Employment Market Correlation:
the loan-to-value ratio and potential Correlation with employment market
challenges in recovering the loan amount. conditions can impact the ability of
3. Economic Downturn Impact: Economic individuals to make mortgage
downturns can lead to increased volatility payments, influencing the risk of
in job markets, impacting the ability of defaults on secured purchases.
individuals to make mortgage payments 3. Real Estate Market Correlation:
and increasing the risk of defaults. Correlation with trends in the real
estate market can impact the value of
the collateral, introducing challenges
in assessing and managing the risk
associated with floating-rate
mortgages

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Money at a 1. Project Cost Fluctuations: Construction 1. Correlation with Real Estate Market:
fixed rate for a projects often face cost overruns due to The success and value of construction
business for a unforeseen factors such as material price projects are often closely correlated
construction increases, labor shortages, or changes in with the real estate market's health,
loan. project scope. These can cause significant affecting both the project's viability
volatility in the financial needs and and the loan's security.
viability of the project. 2. Correlation with Economic
2. Market and Economic Volatility: The Conditions: Construction projects and
value and success of the construction their financing can be significantly
project can be highly sensitive to market impacted by broader economic
and economic conditions, including real conditions, including employment
estate market trends, interest rate rates, economic growth, and
changes, and broader economic cycles. consumer confidence.
3. Interest Rate Movements and 3. Dependency on Supply Chain
Refinancing Risks: Although the loan is at Dynamics: The construction industry
a fixed rate, the broader interest rate is dependent on supply chains for
environment can impact the project's materials and labor. Disruptions or
overall financing, especially if there is a changes in these supply chains can
need for refinancing or securing have a correlated impact on project
additional funds. costs and timelines.
4. Regulatory and Environmental Changes: 4. Correlation with Interest Rate
Changes in regulations, zoning laws, or Trends: For businesses managing
environmental requirements can multiple loans or considering future
introduce volatility into the project's borrowing, there is a correlation
costs and timeline, affecting the loan's between the fixed-rate loan's
stability and the project's feasibility. conditions and the overall interest
rate environment, which can
influence refinancing options and the
cost of future borrowing.

Publicly traded
Equity 1. Price: Equity prices can be highly volatile. 1. Market: Equities, highly correlated
This volatility may lead to significant with the overall market, may lead to
changes in the value of the collateral, loss at the same time when the
requiring frequent rebalancing of the market is in a downturn which could
collateral to maintain the loan. worsen the financial challenges faced
2. Margin Calls: High volatility can trigger by the borrower
margin calls if the value of the collateral 2. Collateral: If the borrowed securities
falls below the threshold. This can create and collateral are correlated,
cash flow challenges for the borrower. Concurrent declines could leave
3. Risk Management: Handling the lenders vulnerable to default.
uncertainties tied to fluctuating equities 3. Diversification: Equities, highly
can be a bit tricky and might call for some correlated with each other, as
advanced risk management tactics and collateral, may not provide effective
plans. diversification, which tries to average
risk in the asset.

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Publicly traded
bond 1. Interest Rate: The volatility of the 1. Interest Rates: The value of a bond
interest rate affects directly bonds, will decrease if the interest rate rises,
leading to significant changes in the value or vice versa, especially in cases of
of the collateral. To maintain the loan, high correlation, which can pose
frequent rebalancing of collateral is challenges for struggling borrowers.
required [3] 2. Collateral: If the borrowed securities
2. Credit Spread: Corporate bonds are also and collateral are correlated,
sensitive to changes in credit spreads. If Concurrent declines could leave
the creditworthiness of the issuer lenders vulnerable to default.
deteriorates, the price of the bond could 3. Diversification: Bonds, highly
decrease, affecting the value of the correlated with each other, as
collateral. collateral, may not provide effective
3. Margin Calls: High volatility can trigger diversification, which tries to average
margin calls if the value of the collateral risk in the asset.
falls below a certain threshold, leading to
cash flow challenges for the borrower.

An illiquid 1. High Valuation Fluctuations: Private 1. Correlation with Market Conditions:

security – you equity investments often experience Despite being illiquid, private equity
choose the significant fluctuations in valuation due investments can still be correlated
security. to changes in the operational and with broader market trends and
(Private Equity) financial performance of the underlying economic conditions, especially over
companies, as well as shifts in investor longer time horizons.
sentiment and market conditions. 2. Diversification Challenges: Due to
2. Impact of Economic Cycles: Private the concentrated nature of many
equity valuations are highly sensitive to private equity investments, achieving
economic cycles. During economic diversification to mitigate correlation
downturns, these investments can rapidly risks with other asset classes can be
decrease in value due to reduced challenging.
profitability and challenges in the 3. Interdependence with Operational
business environment. Performance: The correlation
3. Risk of Leverage: Many private equity between the success of the
deals involve leveraged buyouts, where underlying business ventures and the
debt is used to finance the acquisition of private equity investment's
companies. This leverage can amplify performance can be strong.
volatility, as it can lead to higher returns Operational challenges in the
during good times but exacerbate losses invested companies directly impact
during downturns. investment outcomes.
4. Sector-Specific Volatility: Private equity 4. Correlation with Interest Rates and
portfolios may be concentrated in specific Financing Conditions: Private equity
sectors or industries, leading to higher investments are often sensitive to
volatility when those sectors face market changes in interest rates and credit
pressures or disruptions. availability, which can affect the cost
of capital and the feasibility of
leveraged transactions.

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Step 3. Identifying Data

Scenario Data [4]

Money at a fixed rate for an 1. Data Type: Credit, Economic

unsecured purchase 2. Data Processing: Levels (Credit Score Ranges), Raw Prices/Yields (Interest
Rates)
3. Data Frequency: Mid-Frequency, Weekly, Bi-Weekly, Monthly
4. Data Class: Credit, Interest Rates
5. Data Source: Credit Bureaus (Equifax, Experian, TransUnion), Financial
Institutions, Central Banks (for interest rates)
6. Data Variety: Actual Data (Credit Scores), Observed Data (Interest Rates),
Absolute Data (Credit Scores), Relative Data (Interest Rates)

Money at a floating rate 1. Data Type: Real Estate, Economic

for a secured purchase 2. Data Processing: Levels (Home/Auto Values), Raw Prices/Yields (Interest
Rates)
3. Data Frequency: Mid-Frequency, Weekly, Bi-Weekly, Monthly
4. Data Class: Real Estate, Interest Rates
5. Data Source: Real Estate Databases, Housing Market Reports, Financial
Institutions, Central Banks (for interest rates)
6. Data Variety: Actual Data (Property Values), Observed Data (Interest Rates),
Absolute Data (Property Values), Relative Data (Interest Rates)

Money at a fixed rate for a 1. Data Type: Economic, Asset, Credit

business for a construction 2. Data Processing: Raw Prices, Project Valuations, Cost Overruns
loan. 3. Data Frequency: Monthly, Quarterly
4. Data Class: Real Estate, Corporate Credit
5. Data Source: Financial Institutions, Construction Industry Reports, Business
Credit Reports
6. Data Variety: Actual Data, Estimated Data, Observed Data, Projected Trends

Publicly traded Equity 1. Data Type: Asset, Factor, Economic

2. Data Processing: Raw Prices, Returns, Categories
3. Data Frequency: High-Frequency, Daily, Weekly, Monthly
4. Data Class: Equity, Lending
5. Data Source: Exchanges, Broker, Vendor, Analytics companies
6. Data Variety: Trade Data, Quote Data, Estimated Data, Adjusted Data

Publicly traded bond 1. Data Type: Asset, Credit, Economic, Rating

2. Data Processing: Raw yield, Returns, Levels
3. Data Frequency: Daily, Weekly, Monthly, Quarterly, Annually
4. Data Class: Fixed Income, Lending, Credit
5. Data Source: Exchanges, Broker, Vendor, Analytics companies
6. Data Variety: Trade Data, Quote Data, Estimated Data, Adjusted Data

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

An illiquid security – 1. Data Type: Asset, Economic, Ratings, Factor

private equity 2. Data Processing: Valuations, Returns, Implied Volatilities, Categories
3. Data Frequency: Quarterly, Annually
4. Data Class: Private Equity, Credit, Real Estate (if applicable)
5. Data Source: Private Equity Fund Reports, Audited Financials, Economic and
Industry Research, Market Analytics Providers
6. Data Variety: Actual Data, Estimated Data, Observed Data, Adjusted Data,
Relative Data

Step 6. Describe how the data can help to meet the challenge

Scenario How can the data help to meet the above challenges?

Money at a fixed rate for an Using the credit scores and interest rates data:
unsecured purchase
The challenge addressed: Creditworthiness Assessment Risk

● By analyzing the credit scores, you can identify trends and patterns in
the creditworthiness of individuals.
● Linking interest rates to credit scores allows for a comprehensive
assessment of the risk associated with fixed-rate unsecured purchases.
● Graphing the relationship between interest rates and credit scores can
provide a visual representation of the impact on creditworthiness as
interest rates change.
● This data can assist in developing predictive models to estimate the
likelihood of default based on creditworthiness and interest rate
fluctuations.
● For Example - If the credit scores show a declining trend, it may indicate
a higher risk of default, impacting the financing team's decision-making
process.

Money at a floating rate Using real estate values and interest rates data:
for a secured purchase Challenge addressed: Interest Rate Fluctuation Risk, Property Value Fluctuations
● Analyzing real estate values in conjunction with interest rates provides
insights into the correlation between property values and changes in
interest rates.
● Graphing the relationship between interest rates and real estate values
can illustrate how fluctuations in interest rates impact the value of the
collateral.
● This data can assist in assessing the risk of default by understanding the
sensitivity of property values to interest rate changes.
● For Example - If there is a consistent negative correlation between
interest rate increases and real estate values, it may signal potential
challenges in securing the loan amount with the property as collateral.

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 GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

Publicly traded Equity Using SP500 and Trading Volume

Correlated Challenge
● By this dataset, we prove that the SP500 INDEX does not imply the
volume of trade in that particular day.
● The time-varying nature of the correlation poses challenges for
predictive models.
● The correlation's changing nature requires continuous monitoring and
adaptation of strategies, which can be resource-intensive.
● Since then, the correlation has turned negative, suggesting that rising
volumes are associated with declining prices.

Publicly traded bond Using the Dollar Index and US10 Y:

The challenge addressed: Correlation and Interdependence Between US10Y and

DXY Prices
● predicting and managing the volatility of either US10Y or DXY prices
requires a nuanced approach. Changes in one could serve as a predictive
signal for the other, impacting investment and risk management
strategies.
● The substantial correlation between US10Y and DXY prices indicates a
pronounced interdependence.
● The dynamics of the US10Y and DXY prices, affected by factors such as
interest rates, economic indicators, and FED events, need continuous
monitoring.

An illiquid security – private Using Valuation and Market Condition Data:

equity.
The Challenge Addressed: Valuation and Liquidity Risk
● Private Equity Valuation Trends: Analyzing the valuation trends of private
equity investments to understand their potential growth and risks. This
helps in assessing the long-term value of these illiquid assets.
● Market Conditions and Economic Factors: Examining broader market
conditions and economic factors that can influence the performance of
private equity investments, aiding in identifying external risks.
● Portfolio Company Performance: Monitoring the financial and
operational performance of the underlying portfolio companies to gauge
the health and potential of the private equity investment.
● Sector-Specific Analysis: Understanding sector-specific trends and risks
associated with the portfolio companies, providing insights into
potential industry-specific volatility.

Money at a fixed rate for a Using Project Valuation and Business Credit Data:
business for a construction loan.
The Challenge Addressed: Project Viability and Financial Risk

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GROUP WORK PROJECT # 1 MScFE 600: FINANCIAL DATA
Group Number: 4755

● Project Valuation Analysis: Assessing the projected and ongoing

valuations of the construction project helps in understanding its
potential as collateral and the viability of the investment.
● Business Credit Review: Analyzing the credit history and financial
stability of the business allows for an assessment of the borrower's
ability to successfully complete the project and repay the loan.
● Cost Overrun Monitoring: Regular monitoring of project costs against
initial estimates helps identify potential financial issues early, allowing
for timely intervention.
● Economic and Market Impact Evaluation: Understanding how broader
economic conditions and real estate market trends might impact the
project's success and its future market value.

References

[1] Majaski, Christina, “Secured Debt vs. Unsecured Debt: What’s the Difference?”,
www.investopedia.com ,
https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-
debts.asp

[2] Nichols, Mark, “ Why firms should embrace collateral management transformation”, www.ey.com

https://www.ey.com/en_gr/banking-capital-markets/why-firms-should-embrace-collateral-management-
transformation

[3] Lioudis, Nick, “Inverse Relation Between Interest Rates and Bond Prices”, www.investopedia.com

https://www.investopedia.com/ask/answers/why-interest-rates-have-inverse-relationship-bond-prices/

[4] OpenAI. (2021). GPT-3.5-based ChatGPT [Description of the model]. https://www.openai.com

[5] “Credit Scoring Models: Evaluating Creditworthiness with Deciles” 12 Dec 2023
www.fastercapital.com

https://fastercapital.com/content/Credit-Scoring-Models--Evaluating-Creditworthiness-with-Deciles.html

[6] Segal, Troy, “How Interest Rates Affect Property Values” www.investopedia.com 11 May 2022

https://www.investopedia.com/articles/mortgages-real-estate/08/interest-rates-affect-property-values.a
sp

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