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Operational Obstructions: Hardship with Hybrids is in Systems and Speed

Over the past several weeks, we touched down in Boston, Chicago, and New York with PRMIA to present on the modeling challenges associated with hybrids and advanced structures. 

Dr. Tony Webb, Director of Analytics at FINCAD, presented with a variety of panelists to representatives from a wide variety of organizations across the industry including State Street, Bank of America, the Fed, Moody's, KPMG, and Morgan Stanley.

Tony's presentation touched upon the challenges around hybrid modeling and the advantages of having a modeling framework that can be easily configured with the desired dynamics of the various underlyings, that automatically takes care of the no-arbitrage conditions, and that supports automatic processing (STP) from deal capture to valuation and risk for any instrument.  Examples of applying such a framework included ASCOTS and CVA/DVA/FVA.  Tony also discussed the benefits of Universal Algorithmic Differentiation, and its applicability to calculating risk for both vanilla and hybrid instruments.

The panel discussions centered on a few key themes that came out of the presentation  and audience questions/comments:

  • Trade Capture and Management: the challenges of capturing deal information, including non-standard terms, break clauses, and integrating data from various systems.
  • Market Data Acquisition: Sourcing good quality market and reference data to perform valuation and risk management.
  • Counterparty Credit Risk:  the challenges of calculating CVA, and the question of whether the regulators' prescriptive recipes for mitigating CCR are appropriate.
  • Model Risk: discussion around the resources going into model validation versus developing new improved models.

About the author

Nik Venema's picture

Nik Venema

Communications Manager, FINCAD

Nik Venema weaves FINCAD's written and visual narrative across its suite of fast, accurate, flexible, transparent, and holistic valuation and risk solutions. Prior to this, Nik worked in Quantitative R&D at FINCAD as a Technical Writer and Financial Engineer. Nik holds an undergraduate degree in Finance from the University of the Fraser Valley and an M.Sc. in Finance from Simon Fraser University. Addtionally, Nik is an Instructor of Financial Engineering and Risk Management in the University of the Fraser Valley.

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