Templated Derivative Instruments Model Evaluation

Our expertise in the area

Analyzing exotic derivatives models for credit, market and operational risk Recommending and implementing best practices in risk processes

Client Impact
The client benefits from pre-trade evaluation of risks attached to a trade Comprehensive risk analysis and risk support for trading desks

The Project
The client intends to organize the entire structured/exotic derivatives business into templates or structure of templates. The idea is to streamline business operations of various functions associated with a trading desk. The idea is to develop and organize a trading model that will be subsequently used by finance, credit risk, market risk and operations team for understanding, analyzing, monitoring and processing structured trades. A trading model is developed using a plethora of internal tools, tied together using Microsofts Excel interface. A model thus created, is used by teams in the following manner: Business Function Finance Used for following applications: Correct classification of trade Categorization and bucketing of the trade MTM computation of trade NPV Issuer risk computation Underlier credit risk calculation Counterparty solvency evaluation Estimating live exposure to a counterparty Sensitivity analysis with respect to different pricing inputs Scenario analysis based on market expectations and by bumping values Incorporating risk inputs like market volatility, hedge volatilities etc. for risk estimation Barrier monitoring and pricing implications for discontinuity scenarios Providing cost-benefit evaluation of the trade on a daily basis Providing settlement information like amounts, dates, counterparty accounts, etc. Calculation of intermediate/expiry payments for trades Providing parameters to be used by documentation and legal teams for their processes

Credit

Market Risk

Operations

The TDI that Crisil helps develop, is thus used as a central piece of architecture for connecting various processes that revolve around a trade. We assist the client in developing the model, as well as evaluating it for all the functions described above. A template model:

Economic Capital Calculation

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The model essentially appears as a .xls sheet, but the key is the wiring behind the scenes that helps in pricing the trade and calculating the intermediate and eventual parameter:

Economic Capital Calculation

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Model validation
Once a model is developed, it is evaluated for finance, credit risk, market risk and operations risk and a comprehensive report is generated. This report is sent for approval to respective functions within the bank. Once the respective teams confirm our findings and recommendations, they are implemented and trade is given a green signal for trading. It is thus essential that the trade is evaluated by Crisil before the strike date. Market Risk Analysis
0.20%

Settlements Analysis

0.00%

-0.20%

-0.40%

-0.60%

PV diff
-0.80%

-1.00%

-1.20%

-1.40%

18%

15%

12%

-1.60%

0% 160%

150%

140%

130%

120%

110%

100%

90%

3%

80%

70%

Spot price move

Helping Finance slot the structure

60%

50%

40%

6%

30%

20%

10%

Interest rate

9%

Generating Credit Risk Reports

Economic Capital Calculation

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