Linear interpolation and SoGP: Difference between pages

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A straight-line estimation method for determining an intermediate value.
''Financial markets - conduct - Fixed Income, Currencies and Commodities Markets Standards Board (FMSB).''


For example, consider a set of cashflows which has a net present value (NPV) of +$4m at a yield of 5%, and an NPV of -$4m at a yield of 6%.
Abbreviation for Statement of Good Practice, issued by the FMSB.
Using linear interpolation, the estimated yield at which the cashflows have an NPV of $Nil is given by:
5% + [+4/(+4 --4 = +8)] x (6 - 5)% = 5.5%.
5.5% is the estimated internal rate of return (IRR) of the cashflows.


Interpolation is often used in conjunction with Iteration.


Using iteration the straight-line estimated IRR of 5.5% would then be used, in turn, to recalculate the NPV at the estimated IRR of 5.5%, producing a recalculated NPV even closer to $0.
==See also==
5.5% and the recalculated NPV would then be used with interpolation once again to further refine the estimate of the IRR.
* [[Best practice]]
 
* [[Code of practice]]
This iteration process can be repeated as often as required until the result converges on a sufficiently stable final figure.
* [[Conduct]]
 
* [[Fixed Income, Currencies and Commodities Markets Standards Board]] (FMSB)
Another closely related linear estimation technique is ''extrapolation''.  This involves the straight-line estimation of values outside the range of the data used to do the estimation with. 
* [[Good practice]]
For example, using the data above, the estimated net present value at 7%, using extrapolation = -$4m - $8m = -$12m.
* [[Statement of Good Practice]]
 
* [[Statement of practice]]
== See also ==
* [[Statement of recommended practice]]
* [[Internal rate of return]]
* [[Interpolation]]
* [[Iteration]]
* [[Linear]]
* [[Straight line]]


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[[Category:Identify_and_assess_risks]]
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[[Category:Risk_frameworks]]
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[[Category:Financial_products_and_markets]]

Latest revision as of 10:02, 29 July 2021

Financial markets - conduct - Fixed Income, Currencies and Commodities Markets Standards Board (FMSB).

Abbreviation for Statement of Good Practice, issued by the FMSB.


See also

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