Risk management is a process to identify and measure risk. The goal of risk management is to ensure that risk is under limit
and there is no surprise in future. In capital markets, risk management is accountable for oversighting and monitoring the profit
and loss, market risk, credit risk, liquidity risk and valuation risk activities of a firm.
Capital market risk management system is an information technology platform that helps people in financial markets balance
risk appetite with performance to ultimately optimize capital efficiency, identify probblems, mitigate threats, control risk,
avoid unexpected loss, and enhance opportunities.
Credit Contingent Interest Rate Swap
The valuation model is a simplified closed form solution, in which a lognormal process for the swap rate and an Ornstein-Uhlenbeck (OU) process for the hazard rate are assumed. Both processes are one-factor models and they couple to each other in a standard way. The volatility skews and smiles for swap rates are calculated via a stochastic volatility model, namely SABR model. The default probability of the reference obligor is calibrated to the credit default swap (CDS) market and the volatility of the hazard rate is implied by the market information of CDS options (CDSO).
Amortizing Floor Options
An amortizing floor option consists of 12 floorlets, or put options, on the arithmetic average of the daily 12-month Pibor rate fixings over respective windows of approximately 30 calendar days. Furthermore the notional amount corresponding to each floorlet is specified by an amortization schedule.
Amortizing Floor Option Valuation
CAD Government Bond Curve Bootstrapping
An algorithm is presented for bootstrapping a discount factor curve. The bootstrapping procedure uses an input set of instruments with different maturities (i.e., Canadian government money market securities and bonds) to generate successive points on a discount factor curve.
CAD Government Bond Curve Bootstrapping Algorithm
Monte Carlo for BGM
Brace-Gatarek-Musiela (BGM) model, also called LIBOR Market Model, is a multi-factor log-normal model for pricing interest rate derivatives. The model is usually solved by Monte Carlo simulation.
Credit Exposure for Exotic Derivatives
A model is presented to estimate credit exposure for exotic equity linked notes, consisting of the following products: Yield Generator, Capped Structure, Compounding Cliquet, Compounding Compound Cliquet, and Asian Best Performer. The estimated exposure is used for replacement risk monitoring as well as CVA calculation
Dividend Risk Model
Dividend risk arises from dividend uncertainty, mostly coming from company idiosyncrasy. Like other type of market risk, the dividend risk is primarily due to market perception rather than actual performance of the underlying company. The equity derivatives that take expected dividend amount or yield as a pricing input are exposed to dividend risk.
VaR Performance Indicator
The Basel backtests are focused on determining the adequacy of a VaR measure at a single level, p. In general, however, there is no need to restrict attention to a single VaR level. The unconditional coverage and independence property of an accurate VaR measure should hold for any level of p. This means that if portfolio risk is adequately modeled then the 1% VaR should be violated 1% of the time, the 5% VaR should be violated 5% of the time, the 10% VaR should be violated 10% of the time and so on.
Intraday Exposure
Most product types, with the exception of equity derivatives, will be calculated using the MTM+FPE approach for intraday replacement risk. For deals existing as of the prior end-of-day cycle, the MTM value will be retrieved from centralized sources of this data, which in most cases is Sentry, but may be the product systems themselves if the data is not available in the prior.
Intraday Exposure Introduction
DSR Backtest
As a regulatory requirement, a debt specific risk (DSR) model must be back tested against actual debt specific profit and losses (P/L) of the debt trading portfolio the Bank holds to assess the validity of the DSR model.