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Driving Better Trading Decisions with UAD
By Rob Garfield | July 22, 2015

FINCAD’s on-demand webinar, Improve Trading Performance with Faster Risk Analytics, explores the importance of calculation speed, accuracy and coverage in driving improved trading decisions. Guest speakers include Jeffrey Kutler, Editor-in-Chief of Risk Professional at GARP and Russell Goyder, Director of Quantitative Research and Development at FINCAD. 

During the presentation, Kutler remarks that speed is an essential part of calculating near real-time or, at least, intra-day portfolio trade analytics. But traditional algorithmic differentiation tools have not kept pace with this demand. This has become an increasing problem as firms’ portfolios have grown larger and more complex. 

Goyder explains a big part of the problem is that many firms continue to calculate market sensitivities using the traditional “Bumping” method. Unfortunately this approach is slow, making it difficult for firms to gain an accurate view of intra-day risk, and therefore make informed trading decisions. In the current landscape, Goyder likens bumping risk management to “navigating a dark and dangerous landscape with a small flashlight.” Often firms will try to optimize this approach by reducing the number of calculations run or adding more hardware. But neither of these workarounds are ideal. 

Goyder goes on to discuss a better way, known as algorithmic differentiation (AD), which is hundreds to thousands of times faster than Bumping. Under this method, managing exposures is not an end-of-day exercise, but rather a continuous intraday one. AD gives you crystal clear visibility into your entire risk landscape, including all sensitivities to all of your relevant quotes. As a result, new opportunities open up. For example, real-time risk can allow you to perform more accurate hedging of your portfolios, allowing you to minimize over, or under hedging.  

Unfortunately, many AD tools on the market are slow and use a great deal of memory, and adding AD to your existing models requires time-intensive and complicated coding. For these reasons, Goyder recommends using FINCAD’S patented Universal Algorithm Differentiation (UAD), available in the F3 solution. UAD provides the next step in the evolution of analytic risk. 

UAD offers financial institutions comprehensive, real-time measurement of the sensitivities of a portfolio, trading book or fund. This helps you take advantage of more trading opportunities by allowing rapid assessment of the impact of a new trade’s exposure on your portfolio. Therefore, you can make business decisions quickly and confidently. The net result is more robust market risk management, better management of capital and collateral, and ultimately greater profits. 

“FINCAD’s UAD is truly universal and future-proofing. You can be confident that whatever you trade—whether it is exotic or vanilla—and whenever you trade—whether it be today, tomorrow or next week – it will be covered and handled in a consistent manner. Furthermore, by using UAD to extend your models you can cover new markets and take advantage of new opportunities all while safely managing your exposure throughout,” said Goyder.

To learn more about how AD is taking the industry by storm, check out our related blog post, Join the Algorithmic Differentiation Revolution