FINCAD s Flexible Valuation Adjustment Solution

Transcription

1 FINCAD s Flexible Valuation Adjustment Solution Counterparty credit risk measurement and valuation adjustment (CVA, DVA, FVA) computation are business-critical issues for a wide number of financial institutions. They have implications for earnings and profitability, systems infrastructure and trading decisions. Whether your financial institution is performing a base-level requirement calculation of CVA for accounting and regulatory purposes (such as under IFRS 9 or Basel III) or implementing an active CVA hedging program, there is likely a need to implement or augment your counterparty credit risk management capabilities.

2 This chart shows the expected exposure profiles for the simple case of an uncollateralized 5-year vanilla IR swap, calculated using FINCAD s risk-neutral pricing engine. The swap is initially a par swap, with no current exposure, but can potentially become an asset or liability in the future. The steps occur on cash flow dates. FINCAD s generic approach supports CVA on any netting set.

3 HOW IT WORKS - FINCAD S FLEXIBILITY MAKES THE DIFFERENCE The object-oriented architecture behind the FINCAD solution separates the concepts required to manage any instrument into three individual components: PRODUCT Index expression language - create complex instruments without scripting or coding Single function creates CVA Product for any Trade or netting set, CSA Flexibility to build any product now or in the future MODEL One Model for all portfolios including CVA Products, regardless of complexity involved Consistent & Arbitrage Free VALUATION METHOD User controls the methods and algoritms used for valuation and risk reporting Multiple valuation methods for the same Model and Product are possible Valuation adjustments can be calculated at the product/ trade level, using the traditional approach or FINCAD s unique pricing approach. FINCAD s innovative approach treats the calculation of CVA as a specific pricing problem, in principle no different from pricing complex derivatives. This allows CVA to be calculated using the same models and generic Monte Carlo engine as for any other trade, including exotics. The generic design can handle all types of financial contracts using one function call: CreateCVAProduct. ADDRESSING THE COMPUTATIONALLY DEMANDING COUNTERPARTY CREDIT RISK CALCULATIONS Counterparty credit risk calculations require sophisticated software tools that can handle millions of pricing iterations, even for simple swap portfolios. Many financial institutions face a hard decision about implementing the necessary calculation capabilities that are required to perform these calculations accurately and effectively. To alleviate this difficulty, FINCAD leverages optimization techniques including lazy evaluation and object reuse to accelerate calculation speeds.

4 KEY BENEFITS Easily construct CVA products for vanilla and exotic financial instruments with one function call. ANY TRADE OR NETTING SET Common vanilla examples might include: interest rate swaps, swaptions, FX swaps/ forwards/options, cross-currency swaps. FINCAD s generic engine can just as easily calculate the CVA for structured products, cross-asset instruments, or hybrids. Calculates CVA by netting set, including the impact of any collateral agreement. NETTING & COLLATERAL DATA MANAGEMENT WRONG-WAY RISK P&L ATTRIBUTION Use pre-built or user-defined collateral rules. Unilateral or bilateral CVA / DVA. Wrong-way risk can also be calculated. Non-existent or illiquid CDS instruments can be synthesized using a custom credit index with specific modeling assumptions. Building multiple netting sets and aggregating all data sources will be efficient and robust. Our integration experts can assist with integrating multiple pricing and risk systems into a consolidated framework. Ability to perform wrong-way risk scenario analysis and stresses. Analyze impact of credit correlations from different underlying entities as well as different counterparties. Compute the profit and loss attribution for multi-asset instruments and portfolios of instruments. Since FINCAD computes CVA as a pricing issue, it is possible to compute P&L Attribution while calculating the valuation adjustment. FVA COMPUTATION Integrated calculation of Expected Positive Exposure (EPE) with funding spreads. Value at Risk Monte Carlo, Historical & Conditional Scenario Analysis ADDITIONAL RISK FEATURES P&L Attribution Asset-Liability Management Cheapest to Deliver Curve Construction PFE

5 ABOUT FINCAD Founded in 1990, FINCAD provides advanced modeling solutions built on award-winning, patent pending technology. With more than 4,000 clients in over 80 countries around the world, FINCAD is the leading provider of financial risk analytics technology, enabling global market participants to make informed hedging and investment decisions. FINCAD provides software and services supporting the valuation, reporting and risk management of derivatives and fixed income portfolios to banks, corporate treasuries, hedge funds, asset management firms, audit firms, and governments. FINCAD Analytics can be accessed through Excel, MATLAB, as a Software-as-a- Service or embedded into an existing system through software development kits. Now, over 70 FINCAD Alliance Partners embed FINCAD Analytics within their solutions. FINCAD provides sales and client services from Dublin, Ireland, Beijing, China, and Vancouver, Canada. CORPORATE HEADQUARTERS Central City, Suite nd Avenue Surrey, BC V3T 5X3 Canada EMEA & SALES CLIENT SERVICE CENTRE Block 4, Blackrock Business Park Carysfort Avenue, Blackrock Co Dublin, Ireland USA/Canada Europe London Dublin Elsewhere Fax info@fincad.com Copyright 2013 FinancialCAD Corporation. All rights reserved. FinancialCAD and FINCAD are registered trademarks of FinancialCAD Corporation. Other trademarks are the property of their respective holders. This is for informational purposes only. FINCAD MAKES NO WARRANTIES, EXPRESSED OR IMPLIED, IN THIS SUMMARY. Printed in Canada. XXA13W041-1