Market Value Decline (MVD) is the decrease in the market value of an asset. MVD can occur for a variety of reasons, such as changes in interest rates, changes in the economic outlook, or changes in the creditworthiness of the borrower.
MVD is an important consideration in securitisation transactions because it can affect the value of the securities that are issued. If the market value of the underlying assets declines, the value of the securities will also decline. This can lead to losses for investors.
There are a number of ways to mitigate the risk of MVD in securitisation transactions. One way is to overcollateralize the transaction. This means that the value of the underlying assets is greater than the amount of debt that is issued. This will help to protect investors in the event that the market value of the assets declines.
Another way to mitigate the risk of MVD is to use credit enhancement. Credit enhancement is a mechanism that is used to protect investors from losses. There are a number of different types of credit enhancement, such as excess spread, reserve funds, and letters of credit.
MVD is an important risk factor in securitisation transactions. However, there are a number of ways to mitigate the risk of MVD. By using overcollateralization and credit enhancement, investors can help to protect themselves from losses in the event that the market value of the underlying assets declines.
Here are some of the applications of MVD in the context of securitisation:
- Pricing: MVD can be used to price the securities that are issued in a securitisation transaction. The lower the market value of the underlying assets, the lower the price of the securities will be.
- Risk management: MVD can be used to manage the risk of a securitisation transaction. By understanding the risk of MVD, investors can make informed decisions about whether or not to invest in a securitisation transaction.
- Regulation: MVD can be used to regulate securitisation transactions. Regulators can use MVD to set limits on the amount of debt that can be issued in a securitisation transaction.
Overall, MVD is an important risk factor in securitisation transactions. By understanding MVD, investors can help to protect themselves from losses.