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Basic Analytics

Misys Summit V5.5 FT

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Copyright

COPYRIGHT © 2008-2011 SUMMIT SYSTEMS, INC. ALL RIGHTS RESERVED.

No part of this document may be copied, transmitted, reproduced or stored in any way or by any means
whether digital, electronic, mechanical or otherwise, without the prior written permission of Summit
Systems, Inc.

This document may be subject to change without prior notice. While every effort is made to ensure the
accuracy of this document, it may contain technical inaccuracies or typographical errors. Summit
Systems, Inc assumes no responsibility for errors or omissions in this document and does not warrant
the accuracy or completeness of the information, text, graphics, links, or other items contained within this
document. Customer and other names used in this course are fictitious and in no way are intended to
represent real entities.

This document is provided without warranty of any kind, either express or implied, including but not
limited to the implied warranties of merchantability, fitness for a particular purpose, or non-infringement.
The information presented should only be applied and used in your environment after a careful review of
your own internal policies and procedures. Be aware that the information displayed in our demonstrations
may differ from the configuration at your site. Any trade or market data mentioned in the document does
not correspond to live data. As a result, analytical data shown in these exercises may not be realistic.

The software described in this document constitutes proprietary information of Summit Systems, Inc.,
other Misys group companies or other third parties and may be used only in accordance with the terms of
a licence agreement. Summit Systems, Inc or third parties may make enhancements and changes to the
software described in this document at any time, thereby resulting in changes to this document. Such
changes to the software are documented in the form of subsequent editions of this document.

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Prerequisites

Before doing this course you must have:

• Completed the following courses:


– FT User

• General knowledge of interest rate derivatives trades

• Experience working in the Microsoft Windows environment, especially using a mouse

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What you will learn…

When you have completed this course, you will have an understanding of:

• The analytical reporting capabilities of Misys Summit

• How Filters are used for risk analysis

• How to run:
– Hedging (Market Risk Analysis)
– Trade List and Mark-to-Market
– 2D Sensitivity Analysis
– Horizon Shift Analysis
– Reset Risk Analysis
– Strike Diffusion Analysis
– Composition Analysis
• Real-time analyses (risk, gap, hedge, P&L) and VaR are not covered in this class

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Hedging: Market Risk Analysis

• Hedging

– Can be performed

• At the trade level

• At the portfolio level

• On-line or in a batch

– Measures the impact of market rate shifts on a trade or trade population

– Calculates subsequent hedge requirements

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Hedging Definitions

• Risk
– A component of market data to which a particular transaction or set of
transactions has sensitivity, and thus exposure to
• e.g., a single currency interest rate swap has projection and discounting interest
rate risk (very often the same index)
• e.g., a cap has projection and discounting interest rate risk as well as interest rate
forward volatility risk

• Perturbative Hedge Method


– Shift each underlying market rate by a basis point
– Regenerate the curve
– Measure the sensitivity of the portfolio to that change
– Measure the sensitivity of the underlying market instrument to the rate change
– Divide the two to derive a hedge ratio for that point
– Return the point to the prior value
– Move to the next market instrument

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Hedging: Default Hedge

• Default hedge
– A one basis point perturbative hedge applied to the underlying term structure
• The instruments used in the underlying term structure are then used to present
hedge ratios
– A default hedge on a single currency USD vanilla swap will yield USD Interest
Rate risk for LIBOR

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Hedging: Default Hedge Results

• Default Hedge Results for a


USD Libor Risk
– Term – Points listed on the
USD Libor curve
– Rate – Corresponding
rates and prices
– USD – delta of the portfolio
for each perturbation
– BPV – sensitivity of the
underlying market
instrument to the
perturbation
– Required – (USD/BPV)
represents the amount that
would have to be taken in
that underlying in order to
be delta neutral

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Hedging: Default Results (cont’d)

Configurable
display of
Risk results
for the
Configurable selected
portfolio tree Portfolio/Risk
based upon the
filter

Configurable
Risk Tree for the
selected
Portfolio/sub-
portfolio

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Hedging: Default Hedge Results (cont’d)

Right click on
the desired cell
in the
spreadsheet to
bring up the
popup menu

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Hedging: Default Hedge Results (cont’d)

Select Show trades from the popup menu to view


the trades that make up this position

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Hedging: Default Hedge Results (cont’d)

Select Create Hedge Trade from the popup to create


the required trade to hedge the specific position that
was clicked on.

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Hedging: Default Hedge Results (cont’d)

Select View Graph Results to add the graph panel to


the Market Risk Monitor. The graph will change as
you move within the trees

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Hedge: Global Hedge Parameters

• Global hedge parameters control


features such as:
– Will the hedge be executed as of
today or as of tomorrow?
– Will resets due be simulated and
reset?
• Please refer to Online Help for details
on these fields

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Hedge: Risk Level Parameters

• Risk-level hedge parameters control features such as:


– Is a perturbative, cumulative, parallel or curve based hedge analysis being performed?
– Is a gamma hedge to be executed?
– What hedge instruments are used in the long end?
• On-the-run bonds, swaps
– What is the representation of the term structure?
• Default
• A strip of futures or FRAs
• Swap equivalents
• Please refer to On-Line help for
field descriptions

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Hedge Mode: Perturbation

• Apply one basis point shift to each instrument in term structure and regenerate curve

• Determine sensitivity of the portfolio against each perturbed curve

• Determine sensitivity of each hedge instrument against the appropriate perturbed curve

Required  Portfolio Sensitivity


Hedge Instrument Sensitivity

• As each subsequent point is processed, ensure prior point is reverted to its


original value

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Hedge Mode: Gamma

• By specifying a value in the Gamma shift field of the risk level hedge
parameters window, Summit will execute a gamma hedge

• Shift entire term structure up by specified Gamma value and execute a full
perturbative (or cumulative) hedge

• Shift entire term structure down by the specified Gamma value and execute a
full perturbative (or cumulative) hedge

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Hedge Mode: Gamma (cont’d)

• The gamma can then be computed as


follows:

up  down
 
2 *  shift

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Hedge Mode: Cumulative

• Uses the same method as Perturbation except that prior points are not reverted
to original value once processed

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Hedge Mode: Parallel

• Applies a 1bp shift to each instrument in the curve

• Only a dollar value delta is shown

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Hedge Mode: Curve

• Next generation hedging analysis

• Allows the user to control the hedge


– How is the term structure to be stressed?
– What instruments should be used to hedge with?

• Uses optimization techniques when the problem is either over or under defined

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Hedge Mode: Curve (cont’d)

• Uses Shift Groups to define the shifts to apply to the term structure

• These groups are defined in the Market Data

• A set of shift scenarios (e.g., flatten, steepen, etc.) can be combined into a shift group

0.5

Flatten (S1)
Steepen (S2)
-0.5

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Hedge Mode: Curve (cont’d)

• Uses Hedge Instrument Group Definition to define the set of instruments with
which to immunize the shifts applied to the yield curve

• Any number of the standard Summit instruments can be used:


– Swaps, Swaptions, IRGS, Bonds, Futures and ETOs

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Hedge Mode: Curve (cont’d)

• The shifts are then applied to the underlying term structure

Zero
Flatten
Steepen

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Hedge Mode: Curve, (cont’d)

• The sensitivity of the portfolio to each shift is computed - PSn

• The sensitivity of the hedge instruments to each shift is computed - HmSn

S hift Po rtfo lio H1 H2


Flatte n (S 1) P S1 H1 S 1 H2 S 1
S te e pe n (S 2) P S2 H1 S 2 H2 S 2

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Hedge Mode: Curve, (cont’d)

• The results can then be grouped into a linear system:


 H1S1 H 2S1   H1  PS1 
 
    



H1S 2 
H 2S 2   H 2  PS 2 
  

• By solving this set of simultaneous equations, the hedge requirements (H1 and
H2) can be derived

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Hedge Mode: Curve (cont’d)

• When there are more hedge instruments than shift scenarios, no exact solution
exists

• Summit utilizes either a least squares or an absolute values

 
 min  Hi 
2
 i 

minimization routine to derive the optimum or most robust hedge ratios

 
 m in  H i 
 i 

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Hedge Mode: Curve (cont’d)

• Two windows of hedge results:


– One showing the Portfolio Sensitivity values
– One showing the Hedge Ratios required

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Hedging with On-the-Run (OTR) Bonds

• Bonds designated as OTR bonds are used


as the hedging instrument when
– The AIC segment is present in the
Interest Rate Curve Definition
– In the Hedge Parameters set the AIC
expression to Bond Street
Then the OTR security is used to calculate
the hedge ratio

• They are specified in the Bond Book


Position Monitor ad hoc mode
– Add the column as a visible column as
needed

– Use the filter fields to specify the


currency and type of bond you are
viewing

• Right-click in the spreadsheet to:


– Add observable securities
– Save OTR date
– Save market data

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Filter Definition

• Used to extract trades (portfolios) from the data base based on certain selection
criteria (including but not limited to the following):
– Trade type (swap, cap, swaption, bonds, futures, etc.)
– Trade status (pending, done, verified)
– Currency, index
– Counterparty
– Company, Desk, Book
– Maturity range (generic dates)
– Notional range
– Trade ID

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Filter Definition (cont’d)

• Special codes
– Union – plus sign
• example: Counterparty = CUST1+CUST2
– Exclusion – minus sign
• example: Counterparty = -CUST1

• Wild Card - the percent character can be used as a fuzzy search


– Example: CUST%

• Generic Dates
– Ability to use generic dates in any of the date criterion fields
– Example: Mat Date To = 10Y

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Hedging from Trading Board

• From Trading Board, you can Hedge existing and ‘what-if’ trades

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Risk Analysis Applications

• In Misys Summit FT, each analysis is a separate application

– Application Type is Risk Analysis in Applications and Pages

– Real-time risk applications are not covered in this class

• All analytics are based on a portfolio of trades defined by a filter

• Environment Controller can link together many of the analytics applications

• Trade List can be used to include or exclude trades from the analysis

• The first time an analysis is run with a new filter, the trade population defined by
the filter is loaded into the process

• This trade population is then used for all subsequent analyses for the duration of
that session, even though the underlying trade population or details may have
changed

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Risk Analysis Applications (cont’d)

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Risk Analysis

• The Load button on Trade List reloads trades in the filter

• The Refresh Curves button on the desktop is used to refresh the market data

• In the Environment Controller,

– Reload the Environment – reloads trades in the filter

– Refresh the Environment – refreshes the trades that have changed

– Update linked applications with ENV or trade changes

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Risk Analysis (cont’d)

• Parameters
– Each analysis has a set of parameters which can be configured to change how the
analysis behaves
– For many of the analyses, Parameters can be saved as configurations

• Results
– Each analysis produces a spreadsheet of results or graphical results
– Many analyses provide spreadsheet results that can also be presented in graphical
format
– Spreadsheet results can be printed or exported to Excel
– Click the right mouse in the spreadsheets to see the options

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Risk Analysis Applications (cont’d)

• The subsequent slides step through several of the risk analysis applications
– Value at Risk (VaR) and real-time risk are covered in separate classes

• Each risk analysis application is shown with its corresponding parameters and any
specific underlying static setup required for running

• Click the green arrow icon to execute a Risk Analytics routine

• Note that the green arrow is replaced by a red icon that allows a request to be
cancelled

• For details on each analysis, please refer to Misys Summit Online Help

• All of the Misys Summit FT and base analyses can be run in a batch using portrep,
which takes the same set of parameters
– In /etc/samples/portrep are examples of files containing the required parameters for
running the various analyses

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Trade List: Mark to Market

• Click the Price icon to calculate mark-to-market


• Can link Trade List to other risk applications with Environment Controller
• Can include / exclude trades in the analysis

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MTM Analysis

• This is a standalone application (MTM is also available with Trade List)


• It can be linked to the Environment Controller

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2D Sensitivity Analysis

• Change the Stats and Expression to change the displayed information


• Multiple views can be had by right-clicking in the spreadsheet and select Duplicate Analysis
• Can run this analysis for one risk
• Configurations can be saved

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Horizon Shift Analysis Setup

• Shift Group Market Data is required


• A Generic Asset must be defined as a fixed rate asset with a specified end date and rate

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Horizon Shift Analysis

Shift Curves in
the Shift Group
listed in the
parameters

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Composition Analysis

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Reset Risk Analysis

• Notional amounts (in millions) of trades coming up for rate resets

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Strike Diffusion

• Only applicable for trades with optionality

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Forex Position Analysis

• This analysis provides a way to report gross NPV per currency,


along with conversion into a user specified currency

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BPV Analysis and Consolidated Hedge

• Note the analysis window and two static windows to set the parameters and the group
• It can be linked to the Environment Controller
• Note that CTRL+I from the Config ID opens the Configuration ID window

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FX Option Position by CcyPair Analysis

• Appropriate for FX Spot, FX Forward, FX Swap, FX Option trades

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MM Positions Analysis

• Appropriate for Money Market and Bond trades


• Drilldown to trades available
• It can be linked to the Environment Controller

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Liquidity Analysis

• The liquidity analysis highlights assets,


liabilities and net gaps for user-defined
buckets

• It also calculates cumulative net totals

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Cashflow Analysis

• The Cash Flows analysis


looks at a portfolio in terms
of its actual and projected
cash flows
• For option trades, the
expected payoff values are
reported
• Cash flows and balances
are reported on a future
and net present value
basis

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Additional Analytics Available

• Additional analytics can be run using portrep


– Consolidated Risk (for FX trades)
– Modified Duration
– Cost to Close (also available in the Portfolio Risk Analysis Report)
– Position Reports

• portrep can be run from the command line or in the Generic Report application

• Real-time monitors are available for FX and Bond positions

• Real-time analytics is available for hedge, gap, P&L, and other risk analysis

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Lesson Conclusion

• Congratulations! You have completed Basic Analytics


Reporting. You should now have an understanding of
the basic kinds of hedging available in Misys Summit
and how to use the Analytics applications.

• To learn more about this functionality refer to the Misys


Summit User Guide.

• For more information on the full range of training


offerings provided by Misys, log on the Misys Academy
page of the Misys Web site.

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