As a result of the credit crunch, the global financial services industry is faced with increased and more complex regulation and a call for better risk management so that the market may be renewed and become stable. Better data management will provide better internal management and detailed reporting for the Board as well as information that is critical to the growth and stability of the global market to the external Regulators.
Market risk analysis is the measurement by different means of the risk faced by a financial institution to moves in market prices such as interest and exchange rates, equities, commodities and spreads.
This risk can affect:
- Value: drop in the value of assets (on and off balance sheet) relative to liability
- Liquidity: when market conditions are stressed it may not be possible to execute transactions at quoted market prices. This affects risk premia such as liquidity, exchange rate, credit and other spreads
- Market Risk provides unified risk and profitability analysis. It covers a broad scope and depth of financial analysis, ensuring consistency of results and reducing the cost of analysis. Risk Professional has extensive financial product coverage, from saving accounts, complex loans, insurance instruments to exotic options and structured products
- Market Risk covers value and exposure analysis for all types of methods (fair value, nominal, NPV, observed value, amortized cost, various discounting methods etc), duration, key rate duration, sensitivity measures, various types of gap analysis, price and volatility shift, and VaR (parametric, historical simulation, Monte Carlo)
- Market Risk solutions provide the user with the power of dynamic simulation; which allows evaluating potential decisions in a what-if environment and as a consequence enables highly quantified strategic decisions to be made with confidence.
Using the ITS Universal Market Risk module, the following elements can be considered and analyzed:
- NPV, duration, convexity and greeks: covers analysis related to net present value and its sensitivities. In case of options, it shows the different greeks (sensitivities)
- Price shift analysis: allows defining and analyzing the effects of price shift scenarios on income and value
- Volatility shift analysis: allows defining and analyzing the effects of volatility shift scenarios on income and value
- Replication portfolio: for the replication of non-maturing financial contracts (e.g. saving accounts, deposits etc)
- VaR parametric: based on the Risk Metrics™ matrix structure
- VaR Monte Carlo: based on Monte Carlo simulated market prices distribution
- VaR historical simulation: based on historical prices
- VaR benchmark and decomposition by risk groups: allows decomposition by risk categories (interest rates, FX, stocks etc)
- Incremental VaR: allows the simulation of the impact of planned transactions on the VaR
- Backtesting VaR: for VaR, based on the BIS96 requirements
- Financial product / instrument coverage: all above methods are applied consistently for any type of financial product/instruments from deposits to exotic options