Stress Testing & Scenario Analysis
The ability to stress trading positions by numerous market factors is a critical need in today's markets and is an essential component of effective risk measurement. Cross-asset portfolios require valuation and risk analysis across a disparate and complex set of risk factors. One of the challenges faced by most is to capture the exposures across all risk factors and determine the underlying impact on the balance sheet or trading book, addressing items such as capital, exposure, and profit. Without a comprehensive risk measurement approach, it is impossible to get a holistic picture of your portfolio or position level risk.
In addition, the need for more frequent risk analysis has also increased. End-of-day or over-night processes need to be replaced with intra-day or near real-time risk analysis. Waiting overnight for risk results means waiting for the risk measurement information needed to make an informed decision regarding the optimal time to rebalance your hedging portfolios or to effectively act on collateral or capital related decisions. Information delays could result in increased costs if your trading executions are delayed and the information you have is stale.
Recognizing these issues, FINCAD provides you with the stress testing and scenario analysis capabilities that you need. Our solutions are flexible enough so you can create user-defined scenarios as well as viewing exposures for non-standard time horizons, giving you far more precise visibility into your portfolio. In addition, the flexible architecture in our solutions mean you can price both vanilla and complex instruments so they can be included in your risk analysis–now you can have a complete view of your portfolio's risk so you can make the right decisions faster.
Creating Customized Scenarios for Better Visibility into your Portfolio
- User-defined or Pre-built Scenarios - Your Choice: FINCAD technology enables users to perform computations on scenarios that can be either user-defined or pre-built based upon historic market data (e.g. changes in interest rate term structure, volatility, correlation, and widening spreads).
- Create Individual or Composite Scenarios: Isolated scenarios can be combined into composites where valuations and risk can be calculated under highly tailored market scenarios. For example, you can create one scenario where USD Rates increase by 50bp and another with a change in the EUR/GBP by 1 point. You can then combine these into a composite scenario to see the impact of your portfolio.
- Isolate Portfolio-Level Risk Exposures: FINCAD allows users to isolate portfolio-level risk exposures by user defined filters (e.g. counterparty netting set, trading book, entity, or LEI and more). These can also be run on non-standard time-horizons that are not limited to standard calendar week end, month end, or yearly cycles.
- Hypothetical Scenarios: FINCAD's risk capabilities enable clients to see the incremental risk exposures of hypothetical trades under a variety of market scenarios. Hypothetical scenarios, as an example, can be an input into curve building, profit and loss attribution, and portfolio valuations under different market scenarios.Additionally, Potential Future Exposure and Value at Risk computation can be calculated using historical scenarios or by using stochastic processes, also through user-defined or pre-built scenarios.
- Intra-day Risk: Get the risk information you need from your scenarios on-demand. No need to wait until the end of day or overnight to see what impact these changes can have on your portfolio.
Fill in the Gaps in Coverage
Limitations with numerous legacy systems can restrict you to compute risk analysis on some, but not all, financial instrument types in your trading books. Typically, the excluded instruments were inevitably the most complex leaving gaps in risk analysis practices. FINCAD's generic architecture is flexible enough to value virtually every instrument and to calculate exposures for all market observables as well as factors not directly observable in the market.
Find out more about the flexibility of FINCAD's stress testing and scenario analysis solution, request a customized demonstration.