trm market risk-alm.ppt by oliver germany

Treasury and Risk ManagementMarket Risk Analyzer / Asset Liability Management

TRM / Risk Analyzer / Asset Liability Management

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Agenda

Introduction

Net Present Value

Value-at-Risk

Gap Analysis

Asset Liability Management


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Overview of Banking Risks

Banking RisksBanking Risks

Credit RisksCredit Risks Operational RisksOperational RisksMarket RisksMarket Risks

Interest RatesInterest Rates

Risks to Changes inMarket Rates

Risks to Changes inMarket Rates

Exchange RatesExchange Rates

Security PricesSecurity Prices

Implied VolatilitiesImplied Volatilities

Risks to LiquidityRisks to Liquidity

Refinancing/MaturityRefinancing/Maturity

Default RiskDefault Risk

Risks to Up-/Down-grades (Rating)

Risks to Up-/Down-grades (Rating)

PersonnelPersonnel

TechnologyTechnology

OrganisationOrganisation

ExternalExternal


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-300.000

-200.000

-100.000

0

100.000

200.000

300.000

1 2 3 4 5 6 7 8 9 10

cash-flow

NPV

What is the value of future

cashflows?

-200

-150

-100

-50

0

50

100

150

1 2 3 4 5 6 7 8 9 10PVBP

upper limit

lower limit

How reacts the NPV on changes in

market rates?

Value-at-Risk

-800

-600

-400

-200

0

200

400

600

800

1.000

1.200

1 2 3 4 5 6 7 8 9 10

What is the highest expected loss within a certain period and

a given confidence level?

99% confidence level

1 day holding period

Gap Analysis

0

100.000

200.000

300.000

400.000

500.000

1 2 3 4 5 6 7 8 9 10

asset volume

liability volume

Do the maturities match? Is there a surplus for

certain time buckets which implies an interest rate

risk?Liquidity Analysis

-300.000

-200.000

-100.000

0

100.000

200.000

300.000

1 2 3 4 5 6 7 8 9 10

incoming

outgoing

surplus

Is the bank‘s ability to fulfil its liabilities

ensured?

Market Risk

Market risk involves the uncertainty of earnings resulting from changes in market conditions such as the asset prices, interest rates, volatility and market liquidity.

SAP offers you the toolkit to measure these risks!


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SAP Data Pool

SEM Banking Structure Overview

Market Risk

Net Present Value

Value-at-Risk

Asset-Liability-Management

Gap Analysis

Simulation of new Transactions

Default Risk Limitation

Settlement Risk

Replacement Risk

Credit Risk

Profitability

Net Interest Margin

Funds Transfer Pricing

SAP Financials

Financial & Management Accounting

Core Banking

Bank Transactions

3rd Party Providers

Market Data


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Agenda

Introduction

Net Present Value

Value-at-Risk

Gap Analysis



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Fixed cash flows Variable cash flows Uncertain cash flows

Valuation

Deterministic instruments Optional instruments

Discounting with zero bond discounting factors for the relevant yield curves

1. Determination of forward rates using the

relevant yield curve 2. Calculation of future

cash flows3. Discounting

Option price formulas- Black & Scholes- Binomial- Garman/Kolhagen

Standard bondsFixed-rate loansMoney market

Floating rate notesVariable loans

Caps/FloorsFX optionsSwaptions

Swap/FRA

Net Present Value – Calculation


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Net Present Value


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Scenario Analysis / What-if Analysis


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Sensitivity Analysis


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Agenda

Introduction

Net Present Value

Value-at-Risk

Gap Analysis



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Value-at-Risk Approaches

Value-at-RiskValue-at-Risk

Variance/CovarianceVariance/Covariance Historical SimulationHistorical Simulation Monte-Carlo SimulationMonte-Carlo Simulation

DeltaDelta

Delta / GammaDelta / Gamma

Full ValuationFull Valuation

DeltaDelta


Full ValuationFull Valuation

DeltaDelta


CombinationCombination


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Full Valuation and Delta Approach

NPV-function

Approximation

rise inmarket prices

decrease of market prices

market price

NPV-risk

NPV-chance

Error

Error

NP

V-

risk

-ap

pr.

NP

V-

chan

ce-

app

r.

NPV

currentmarket price


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VaR methods for product type related calculation

full valuationfull valuation

delta/gamma approach

delta/gamma approach

delta approach

delta approach

Calculation of Profit and Losses (NPV related)Calculation of Profit and Losses (NPV related)

HistoricalSimulationbased onProfit and

Losses

HistoricalSimulationbased onProfit and

Losses

Profit and Losses

PortfolioPortfolio

bonds

floater

simple options

exotic options


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Value-at-Risk


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Historical Simulation – P&L Distribution

Graphical and numerical view of Profit & Loss

Graphical view of Profit & Loss Distribution


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Backtesting

t1 t2

P1 P2Market data

Difference

Portfolio in t1

Value-at-Risk

Comparison

unchangedPortfolio of t1

original NPVrelated to market

data in t1

NPV related tochanged

market data in t2


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Agenda

Introduction

Net Present Value

Value-at-Risk

Gap Analysis



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Gap Analysis

Position Outflow Cash flow Liquidity Interest Result Evaluation

key date positionaverage position

cash flows in the sense of

NPV risk positions

liquidity in the sense of

expected cash flows

interest results based on the

average position capital commitment

distinction of interest

contribution and structure

contribution

interest commitmentcapital commitment

product interest rateFTP rate / opportunity interest rate

Gap Analysis Reports


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Gap Analysis: Position

Floater with term 4 years and interest condition 6-months-Euribor:Floater with term 4 years and interest condition 6-months-Euribor:

0.50.5 1.01.0 1.51.5 2.02.0 2.52.5 3.03.0 3.53.5 4.04.0

position (interest related)position (interest related)

0.50.5 1.01.0 1.51.5 2.02.0 2.52.5 3.03.0 3.53.5 4.04.0

position (capital related)position (capital related)

100 Mill. Euro

100 Mill. Euro


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105 Mill. Euro105 Mill. Euro


0.50.5 1.01.0 1.51.5 2.02.0 2.52.5 3.03.0 3.53.5 4.04.0

interest paymentinterest payment

repaymentrepayment


0.50.5 1.01.0 1.51.5 2.02.0 2.52.5 3.03.0 3.53.5 4.04.0

fixedinterest rate

fixedinterest rate

repaymentrepayment

calculated by forward ratescalculated by forward rates

Under the assumption of a flat yield curve of 10 %, in addition to the fixed interestrate the Euribor-payments would also be taken into account with 5 Mill. per midyear:

Under the assumption of a flat yield curve of 10 %, in addition to the fixed interestrate the Euribor-payments would also be taken into account with 5 Mill. per midyear:

Gap Analysis: Cash-Flow and Liquidity


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Position Evaluation


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Liquidity Evaluation


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Net Interest Income Simulation


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Agenda

Introduction

Net Present Value

Value-at-Risk

Gap Analysis



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Process of Creating Simulated Transactions

ExecuteGap Analysis

The results of the Gap Analysis are the basis for the simulation process

Individual Simulation

Growth planning on any desired hierarchy level

Fictitious Transactions

Simulation of single fictitious transactions like• FX forward• Money Market• Swap• Swaption• Cap• Floor

Standard Simulation

Closing the gaps of• Position• Outflow• Cash flow or • Liquiditywith forward respectively spot transactions

Evaluate Simulated

Transactions in NPV-/VaR-

Reports

The simulated transactions can be saved in the data pool and included in the NPV- and VaR-reports

Optional Alternatives / Combinations


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Simulation Log


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Growth Planning

t1

S I M U L A T E DT R A N S A C T I O N S

t2 t3 t4

e.g. Mortgage Loanse.g. Mortgage Loans

A C T U A L P O R T F O L I O

100 Mill. EUR100 Mill. EUR


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Net Interest Income after Simulation of New Transactions

LiabilitiesAssets

Balance Sheet 2005

LiabilitiesAssets

Balance Sheet 2006

LiabilitiesAssets

Balance Sheet 2007

Interest Revenue

Interest Expense

Net Interest Income 2007

Interest Revenue

Interest Expense


Interest Revenue

Interest Expense


New Transactions ‘05New Transactions ‘05

New Transactions ‘06





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MaturityBands

The Simulation Process

Gap Analysis

•Position•Liquidity•Net Interest Income

RealTransactions

StoreCalculation

Standard Simulation,Fictitious Hedging

NII

Time

Market DataScenarios

PlanningVariants

Due DateScenarios


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SAP Functions for Market Risk Management

SAP Market Risk ManagementSAP Market Risk Management

Stress Testing• Worst / Best Case Scenario• Shock Scenarios

Stress Testing• Worst / Best Case Scenario• Shock Scenarios

User-defined scenariosUser-defined scenarios

Value-at-Risk• Variance/Covariance• Historical Simulation• Monte Carlo Simulation• Backtesting

Value-at-Risk• Variance/Covariance• Historical Simulation• Monte Carlo Simulation• Backtesting

Sensitivity Analysis• Basis Point Value• Duration• Convexity

Sensitivity Analysis• Basis Point Value• Duration• Convexity

NPV related Reports• Mark-to-Market• Market Prices

NPV related Reports• Mark-to-Market• Market Prices

Reports related toNominal Values

Reports related toNominal Values

Liquidity AnalysisLiquidity AnalysisInterest Result

Simulation(based on actual and

simulated transactions)

Interest Result Simulation

(based on actual and simulated transactions)

Position AnalysisPosition Analysis New Business Simulation

New Business Simulation

Interest Result Evaluation

Interest Result Evaluation

Full integration of simulated transactions in NPV based reports

and Gap reports

Full integration of simulated transactions in NPV based reports

and Gap reports

Historical Time SeriesHistorical Time Series Gap AnalysisGap Analysis Asset Liability Management



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Thurgauerstrasse 54 · CH-8050 ZurichTel +41 44 318 70 00 · Fax +41 44 31870 10

[email protected] · www.ifb-group.com

Oliver Greiner · [email protected]

trm market risk-alm.ppt by oliver germany

Business

risk assetliability

market risk market risk

rate risk

risk approaches value

asset prices

asset volume liability

market rates risks

market liquidity