All firms with financial positions, whether for investment or hedging purposes are now required to fully disclose the potential implications and the risk factors inherent with their trades or hedges. Such disclosure requires not only fair value analysis but also Value at Risk and Scenario capability. The Perfect Hedge provides all of this together with custom analytical risk reports such as option position greeks or duration, convexity, etc. and other such tactical measures of risk.
Custom reports can be produced for various position datasets (i.e. by user, group, organization, counterparty, exchange, instrument type, currency, GL account, issuer, etc.). Reports may be calculated on a current or historical date thus enabling the production of risk disclosure information for past financial reporting dates as well as for future financial reporting dates. Calculations can be performed unattended by setting up calculation job schedules.
Var Analysis
VaR or “Value at Risk” provides an estimate of how much value can be lost, by a portfolio over a time horizon, subject to a specific confidence interval. VaR has become a preferred risk measure for investors, management and securities regulators.
VaR (Value at Risk) Using The Variance-Covariance Method
The Perfect Hedge calculates VaR, diversified VaR and undiversified VaR for portfolio positions. Portfolios may contain any set of positions. VaR and component VaR are calculated by currency, by asset class and for individual risk points and all VaR calculations may be performed on a current or historical basis. The VaR calculation service is made available with a standard VaR assumption data set (contains historical volatility and correlation data content), but we can also support the setup and calculation of custom VaR data sets.
VaR Using The Historical Scenario Method
The Perfect Hedge calculates Historical Value at Risk using the historical scenario method to provide an estimate of how much money can be lost by a portfolio over a time horizon, subject to a confidence interval. Historical VaR uses actual historical price, volatility and yield change changes, all automatically managed by the Market Data Application, to generate scenarios and calculate a distribution of position (trade) and portfolio market value changes. Having the distribution, the system then calculates VaR at a specified confidence interval. The Historical Scenario Method is a preferred method that revalues all positions (trades) and as a consequence, non-linear or option-related changes in portfolio valuation results are fully captured. The scenario generation service is flexible, and permits the combination of historical-type scenarios with any number of user-specified scenarios to create realistic historical scenarios to support inquiries by risk management committees. As a result of its analytical strength, flexibility and intuitive appeal, this method is often the method chosen to support regulatory driven risk disclosure requirements.
Scenario Analysis
All financial managers take their own view of what “could happen”. History can provide one way of constructing “what if” scenarios.
The Perfect Hedge calculates Shock Scenario Risk Analysis by supporting:
- The specification of interest rate shocks, FX shocks, commodity price shocks or historical price (or rate) changes with respect to corresponding current and historical market data sets
- The automatic generation of such shock scenario datasets
- The current date or historical valuation of a single position, a set of positions, hedges (a set of related positions) and sets of portfolios consisting of sets of positions using such scenario valuation assumption data
- The summary analytical reporting of such valuation results to produce two types of scenario reports
a Portfolio Scenario Report that calculates the value and changes in value of a- portfolio given the scenario on a current date or historical basis and broken out by currency and asset and
- a Trade Scenario Report that calculates the value and changes in value of a trade under a chosen scenario – also performed on a current date or historical date basis.