Derivatives Analytics Overview
Prashanth Kuttuva,Executive Director
E &Y
Derivatives Analytics Presented by: Prashanth Kuttuva,
Executive Director, Ernst and Young – Global Talent Hub
2016 SPRING INFORMATION EXCELLENCE SUMMIT
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Analytics - at Financial Institutions
Broad Subject:
- Marketing Analytics
- Retail Banking Analytics
- Operational Risk
- HR Analytics
- Insurance Analytics
- Banking Book Analytics
- etc………
- Trading Book Analytics – High quality data
Securities - Corporate Bonds, Equity, Sovereign Bonds
Financial Derivatives - Forwards, Futures, Swaps, Options
Securitized Products - Asset Backed Securities (Credit Card, Mortgages)
Common Issue: Quality of the Data
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Derivatives Risk Measurement – Process Flow
Risk and Sensitivity
Measures Valuation
Bootstrapping
(Data Processing) Market Data OTC
NYSE
HKSE
BSE
NSEI
NASDAQ
LSE
50% 50%
Learning Scale
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Derivatives - Asset Classes “ Derivatives is a financial product derived from another product” Asset classes
Foreign Exchange
Commodity
Interest Rate or Fixed Income
Credit derivatives
Equities/Index
Derivatives Analytics
We get more reliable data, so less assumption
Advanced analytics is used
MOST IMPORTANTLY – 20+ Major countries
- 5000+ traded instruments for just Interest rate market
- 5000+ traded credit spread for Credit derivatives market
- ……. Variety of commodities, Equites traded
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Deep Dive – USD Interest Rate Market
Presented below is the deep dive of Interest Rate Data for the USD
Market with LIBOR underlying.
USD Interest Rate Market Available Tenors in market
Cash rates (LIBOR, BB, BA) Overnight to one year
Futures (LIBOR) 1 months to 2 years
FRA (LIBOR) 3 months to 2 years
Swap rates (LIBOR) 2 years to 30 years
Tenor basis spreads (LIBOR) 1 year to 30 years
Cap volatility ATM and Skew Vol from 1 year to 10 years
Swaption volatility ATM and Skew Vol from 1 year to 30 years
OIS (Fed Funds) Overnight to 30 years
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USD 5Y Swap Rate - Convention
Interest Rate Curve - USD
Detailed below is the convention of a 5Y Interest rate swap.
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Convention is the key
The models and the system should read the convention and the data
correctly. If the system fails to read the data accurately there may be a
huge valuation error.
Example: Correct Convention Incorrect Convention
Notional $ 100,000,000 $ 100,000,000
10Y Swap Rate 5.00% 5.00%
Day Count Convention 30/360 Act/360
Interest for 10 years $ 50,625,000 $ 51,328,125
Difference in interest $703,125
Example: Correct Convention Incorrect Convention
10Y Swap Rate 5.00% 5.00%
Compounding Convention Semi-Annual Monthly
Interest for 10 years $ 50,625,000 $ 51,161,898
Difference in interest $536,898
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14 September 2015 Derivatives Analytics Overview
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