RISKSNAP Solutions
RiskSnap - HVaR is a risk system that utilizes verifiable past events in order to determine the amount of risk for a trade or a portfolio of trades within the time frame required to liquidate or hedge these trades. RiskSnap also provides the option for risk factor weighting in order to prevent panic buying/selling in high volalitility and overreaching in low volatility.
The system is easy to use and transparent. All valuations within the observation periods can easily be verified, including option pricers that can price on any day in the past using the "shocked" rates while displaying the market risk parameters.
VaR Usage
1) User is a portfolio manager and buys equity from a broker dealer and wants to estimate "hair-cutted" collateral call from the broker. The collateral call is a measure of risk of the portfolio
2) User is a broker-dealer and sells an equity product to a retail client. The broker dealer is interested in the retail client's risk.
3) User is an exchange and sells a futures trade to a retail investor and needs to measure the retail investor's risk to the exchange.
4) User is an exchange and sells a futures trade to a bank. The exchange is interested not only in the risk of the bank to the exchange, but the risk of the exchange to the bank as regulations require banks to include exchanges in their counterparty risk calculations.
5) User is a retail investor who wants to measure portfolio risk and estimate margin requirements from the broker-dealer..
6) User is a broker-dealer and wants to measure the risk that the exchange feels arises from the broker-dealer net of collateral.
Flexibility
Observation Period
Both the stress period and the current period are defined at the transaction level.
Flexibility accommodates the variability of stress periods among assets.
RiskSnap can automatically determine the worst case stress scenario for a netted set of instruments and update the observation period daily.
Percentiles
Percentiles can be set at the transaction level for HVaR and Expected Shortfall for each observation period.
This provides the flexibiity of requiring a higher confidence level for certain transactions.
Holding Period
The holding period can be set at the transaction level.
For example, for clients with a large concentration of assets the time to liquidate might be greater.
Weighting
EWMA weighting is set for each risk factor with a choice of 3 smoothing factors for each.
Weighting is excluded for the stress periods.
Full Valuation
Products
Interest Rate Swaps, Bonds, Foreign Exchange Forwards, Futures, Options, Interest Rate Swaps, Equity Swaps, Energy Swaps
Second generation examples: Swaptions, Equity and Foreign Exchange Baskets, Options on Baskets, 2-asset options, Options on a strip of forwards, Options on Bond Futures with cheapest-to-deliver calculations, Average rate basket options, Knock-in and Knock-out options.
Curves
Bond yield curves, Interest Rate Swap curves with OIS discounting, Daily discount factors
Futures curves with turn of the month smoothing.
Capability to convert option prices to a volatility surface.
Fixed Income
US Bond Market: US Treasury Bonds, Medium Term Notes, Municipal Bonds, Agency Bonds; Canadian Bond Market. Others on request.
Collateral bonds are segregated
Pricing can be by either Yield to Price, or cashflow method
Structured Products
Netting sets allow products such as notes to be combined with options and other exotics.
Risk profiling can be on the structured product as an entity, or underlying assets.
Limit Management
Portfolio Netting
Netting is by netting set within a Client, within a Portfolio or within a Product.
The netting set is defined by need, e.g a common netting set is an equity trade with an equity option, or a butterfly spread, or bond futures with the underlying bond.
Collateral and Limits
Collateral bonds and equities are defined separately with HVaR/ES used to calculate the haircut.
The risk amount, collateral supplied (including cash) are compared to limits for breach management. Limits can be by client, portfolio or product.
What-If
Trades can be copied to an excel spreadsheet and changes applied as needed including all HVar parameters (observation periods, holding periods, EWMA factor) and copied back.
All reports applicable to confirmed trades will be available within seconds.
Antithetic Risk
Antithetic Risk is used to determine limit breaches imposed by a counterparty to a trade. Antithetic risk can be viewed as the opposite position, ie.. a short position in the same asset that is a long position.