PV 10% for Fixed Income Portfolio

[Yan He]

Sorry guys for so many questions.

Did anyone ever hear about PV 10% for Fixed Income portfolio? We have PV01, DV01 and CS01....but how come I never heard about this concept while being asked to provide this data by some Capital Management firm. #-o

 

[Uncle Max]

As I know PV10 is just another way to calculate present value. It mostly used to discount cashflows of energy companies, so Woody might know more.

I belive, they call it PV10, because 10% rate is used as a discount rate for all future cashflows.

I don't know if it makes sense for Fixed Income securities though...

 

[Yan He]

As I know PV10 is just another way to calculate present value. It mostly used to discount cashflows of energy companies, so Woody might know more.

I belive, they call it PV10, because 10% rate is used as a discount rate for all future cashflows.

I don't know if it makes sense for Fixed Income securities though...

Soyou mean PV 10% is actually Present Value of 10% shift instead of 1 bp?

If so, can I simply multipy my historical PV01 by 10 to get PV 10:-k

 

[Uncle Max]

I don't know. Don't think it's that easy.

You'd better ask someone who knows this stuff.

I wouldn't trust in max's believes

 

[Larry Bear]

Soyou mean PV 10% is actually Present Value of 10% shift instead of 1 bp?

If so, can I simply multipy my historical PV01 by 10 to get PV 10:-k

Yan He, I would like to meet you. I never heard of PV10 all thru PhD & CFA programs, but I notice that oil people talk about it a lot. I assume it's either a short program to calclulate PV using 10% to discount cash flows, or one to calculate the NPV of 10 years' of cash flows. I found this forum looking up the PV-10 subject in google, in order to learn more. Perhaps further search will find some other reference. As you should know, ROE is always equal to the number you calculate from cash flows, plus whatever number you need to get to 10%. Larry

 

[Yan He]

Yan He, I would like to meet you. I never heard of PV10 all thru PhD & CFA programs, but I notice that oil people talk about it a lot. I assume it's either a short program to calclulate PV using 10% to discount cash flows, or one to calculate the NPV of 10 years' of cash flows. I found this forum looking up the PV-10 subject in google, in order to learn more. Perhaps further search will find some other reference. As you should know, ROE is always equal to the number you calculate from cash flows, plus whatever number you need to get to 10%. Larry

Larry, welcome to Quantnet community.
That was my first time being asked to provide a PV10 number for our Fixed Income book. I never heard about it or encountered it before, though I am a newbie in this field. It actually turned out to be the calculation of NPV, but indeed, 10% to discount cash flow.

The commodity book that had oil (energy products) I dealt did not require to look at PV-10

I am also learning here.

Anyone has any idea about PV-10 in oil?

 

[Larry Bear]

Yan He: I have seen that oil companies use PV-10 (whatever it is exactly) to evaluate drilling prospects, and talk about it in presentations to investment analysts. I don't look at commodities trading, so I have no idea that they use it there. Larry

 

[Larry Bear]

Yan He: I went offline & continued google search for more complete meaning of PV10. I found that the best search was for "SEC PV-10" in google. The term means the NPV of some asset or activity after discounting expected cash flows (before taxes or interest) by 10% per year. I gather that the SEC allows oil exploration companies to disclose the estimated value of their proven oil & gas reserves (as of some stated date) by using "PV-10". SEC has regulations & accounting bulletins that give details for oil companies on how this is to be done, and FASB accounting authority also has rules relating to this. An independent consultant must determine proven reserves, determine annual production, & price all production at fixed current prices. Of course, all this assumes that you have already selected an optimum drilling & production program (a challenging problem in itself), and that oil prices won't change. I wonder if they can assume that costs or technology can change over time or with oil prices?

I also recall recently reading a presentation to professional investment analysts where the oil executive said that "using PV10 methods" they had determined that their current drilling prospects would produce an ROI of 50-100% (which is an EXTREMELY attractive return on discovery of unusually rich oil pool). Thus, he is using the term loosely to mean a ROI calculation, rather than a NPV discounted at 10%. Of course, with such good results calculated, and rising oil prices, they were very busy trying to drill more wells even faster, even if they had to pay premium rates to drillers, and even change the entire physical drilling program. So much for the value of fixed models.

I can't imagine any intelligent use of PV-10 to blindly value any and all fixed-income instruments. This sounds like typical stupid demands of financial executives who never took a single course in finance (a frequent occurance in my experience) because they heard of this term and want to appear sophisticated.

To be tactful and avoid losing my job, I would ask them what they mean by this in their request. Perhaps they want something else, like an estimated value using some "reasonable" or "normal" discount rate applied to each fixed income asset.

Larry

 

[Yan He]

PV10 is actually 10% shift in credit spread, or it's actually bigger scale of CS01. It's mostly used in measure credit related products sensitivity. The reason for "10" is most Emerging Market credit products shift in bigger scale than US market, so, instead of CS01, some Fixed Income book use PV10. It's actually have no direct relation with PV01 or interest rate curve change or shift.