CASE STUDY
Fixed Income Portfolio
Gap Risk Analysis
Gap risk analysis system is used to examine the exposure to interest rate risk that a bank has on various horizons across multiple currencies. The principal issue is that different kinds of instruments were recording in different systems in the bank though all of them had various risks to interest rate movements at different time horizons. Gap risk analysis is based on the assumption that if assets and liabilities (loans and deposits) at a specific horizon match exactly then there is no interest rate risk at that horizon. To the extend that there is a gap, the risk is measured by the overnight funding or deposit income that will be required at the current market rates. The system also had a what if scenario analysis tool which allowed traders to see what changes to interest rates at various horizons would do to their portfolio. This kind of analysis was previously not possible because the operational systems were only for settlement of the transactions (move money or calculated interest) and not designed to measure the market risk or its sensitivities to various movements in the market.
Global Portfolio Optimizer
CKO – Chow Kritzman Optimizer is a multi-risk portfolio optimizer used for Global Asset Allocation. This was designed and built for State Street and is currently deployed as a web application with dynamic UI elements (ActiveX controls displaying risk surfaces based on Terrain Modeling technology). The covariance matrix calculation was not straightforward, instead the continuous daily returns were split into normal and extreme event sets and two sets of covariance matrices calculated and later recombined for the expected regime in the future for the optimization. The return calculations themselves had to be precise and simple returns annualized returns had to be used for presentation while continuous returns had to be used behind the scenes for all the calculations and combinations.
TrustFort Fund Manager (TFM)
TFM is a product for Hedge Funds to help deal with multiple providers (prime brokers and administrators), scenario analysis, SEC compliance etc. TFM allows you to overcome the problem that most hedge funds face viz. some error or the other with one of your service providers means that their system is not accurate when you look at the figures. While it does get corrected; by the time that happens, other errors come in. TFM allows you to put in manual overrides on the loaded data so that your organization has the correct information (positions, NAV, performance, reconciliation status etc) in real time. It also helps you with reporting requirements to comply with the new SEC regulations.
