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Home > Resources > Articles > 2008

Perform Sensitivity Analysis With FINCAD's Key Rate Risk Analysis Workbook

In v11, FINCAD introduced a powerful Key Rate Risk Analysis workbook that makes it easy to perform sensitivity analysis on a portfolio of interest rate sensitive instruments.

» To download the latest trial version of FINCAD Analytics, contact a FINCAD Representative.

This workbook is accessible via FINCAD XL → Workbooks (User data) → Analysis Tools → Key Rate Risk Analysis.

In the Key Rate Risk Analysis workbook (Figure 1), sensitivity analysis can be performed on the following portfolios of instruments: Bonds, Swaps, Swaptions, and Caps/Floors. Each instrument type would have a corresponding spreadsheet. The workbook allows the user to perform sensitivity analysis by applying shifts to the spot rate curve or directly to the raw rates. The bumps can be applied as parallel shifts or applied to specific time points.

Figure 1

The Main sheet displays the net exposure of the portfolio, which is the change in value of the portfolio that results if the selected key rate is shifted. By calculating the change in values at key time points, the analysis can be used to identify how much of a particular instrument should be used to hedge a position.

Figure 2

In the Key Rate Risk Analysis workbook, named ranges are used to define the curve shifts applied to the spot rate curve and the raw rates. These may be found on the tabs Curve Bumps (Figure 2) and Rate Bumps. These named ranges are used as the input in the df_crv argument within the FINCAD pricing functions to calculate the fair value of the instruments using the bumped discount factor curve.

Figure 3

To determine the sensitivity of the portfolio to curve or rate shifts, the following steps are implemented in the workbook:

1. The fair value of the portfolio is calculated using a discount factor curve with no bumps.
2. The portfolio is revalued using the bumped curve and raw rates. (See Figure 3).
3. The difference between the fair values calculated in steps 1 and 2 are used to determine the sensitivity of the portfolio to parallel shifts as well as shifts to specific key rates.

Figure 4

Once the details of the instruments are entered on the appropriate spreadsheet, and the sheet is calculated, the fair values and the details of the sensitivity analysis using curve bumps and rate bumps will be displayed. (Figure 4).

In the Swaps worksheet, you can find more details of how the sensitivity analysis values are calculated.

Implementing Key Rate Risk Analysis in FINCAD Developer

Also in v11, the swap curve building functionality was enhanced to allow for key rate risk analysis to be easily performed by the user. Using the FINCAD function

aaSwap_crv3, users can output a series of discount factor curves where each curve corresponds to one of the raw input rates being bumped by a given spread. These discount factor curves, along with appropriate pricing functions, can be used to determine exposures to the various raw rates that were used to construct the swap curve. This would be useful to FINCAD Developer users who wish to perform key rate risk analysis.

Disclaimer

Your use of the information in this article is at your own risk. The information in this article is provided on an "as is" basis and without any representation, obligation, or warranty from FINCAD of any kind, whether express or implied. We hope that such information will assist you, but it should not be used or relied upon as a substitute for your own independent research.

» For more information or a customized demonstration of the software, contact a FINCAD Representative.