Market Risk Measurement

The system offers a broad range of risk methodologies allowing measure, monitor, and manage market risk. All risk measures can be calculated, stored and reported at every level of a flexible, user defined aggregation structure.

Main Features

Incorporate advanced risk methodologies

RiskValue uses the Value-at-Risk (VaR) methodology in order to quantify risk within any portfolio. VaR can be defined as the potential loss that may be incurred by a portfolio, trading desk or organization unit as a result of adverse market movements over a certain time period. 

  • Variance/Covariance, Monte Carlo and Historical simulation methods for VaR calculation
  • Interest rate and credit spread risks derived from fixed-income exposures with detailed sensitivity analysis
  • FX exposures using translated NPV in reference currency
  • Systemic and residual risks using multiple-betas factor model
  • Marginal, incremental and component risk decomposition
  • Volatility risk which includes the effects of the volatility smile and term structure and their interaction with other risk factors
  • Evaluation of VaR results with clean and dirty back testing methodologies

Calculate your own statistical measures

  • Independent calculation of volatilities, correlations and betas using linear or exponential weighting algorithms
  • Create calculation profiles, execute and store the results co for internal or other specific need
  • Historical maintenance of statistical measures facilitate audit reports
  • Manage easily a global risk factors universe with market data integrity checks, missing data warnings and calendars

Advanced instrument revaluation algorithms

In order to quantify risk, the system needs to perform frequent revaluations of all positions, comparing actual to scenario-derived mark-to-market. The most efficient algorithms have been implemented, taking under account both accuracy and speed considerations:

  • For Bonds, Swaps, and other Cash-Flow instruments the system evaluates future cash flows and calculates their net present values using zero discount factors derived from the appropriate nominal yield curve. Exponential interpolation of Zero Discount Factors is used for cash flows in non-standard periods.
  • Instruments with embedded options are evaluated using extensions of the Black-Scholes or the Binomial models, using Analytical approximations where appropriate in order to optimize speed. 

Risk decomposition

In order to assist the professional risk managers in understanding the sources of risk, RiskValue decomposes total diversified portfolio risk in its basic constituents. This is done in three different dimensions:

  • Decomposition by Portfolio: This allows understanding which sub-portfolio contributes mostly to a group’s total risk
  • Decomposition by Risk Factor: For example, in a complex Bond and Swap portfolio, you may realize that you are mostly exposed to the ten year USD interest rate
  • Decomposition by Position/Security: This analysis allows identifying securities which contribute significantly to the overall risk, taking under account all risk factors related to this security
  • Decomposition by Asset Class: This analysis understanding which user defined asset class contributes mostly to a portfolio total risk

Volatility (Vega) Risk

Many risk systems assume a constant volatility level, therefore failing to account properly for VEGA Risk, which is often a significant risk hidden behind options positions. RiskValue includes the effects of the volatility smile and term structure on Vega risk and their interaction with other risk factors.

  • Smile: Out-of-the money options often have higher implied volatilities than at-the-money options. Typically, the curvature (or “smile”) is less for longer-term options than for short-term options, and may change over time.
  • Term structure: The term structure of implied volatility describes the pattern of options with the same exercise price but different maturities, which generally have different implied volatilities. This may also change over time.