Webinar # 1 Valuation of interest rate swaps with Fairmat · 2020-02-05 · Derivative products de...

Derivative products definition and featuresPricing and analytics

Webinar # 1Valuation of interest rate swaps with Fairmat

Matteo [email protected]

Fairmat SRL

March 7th, 2013

The contents of this presentation are property of Fairmat SRL, editing and distribution are forbidden.


DefinitionDerivative products categories

Part I:

Derivative products definition and features




What is a derivative?

Definition # 1, from Wikipedia

A derivative instrument is any contract which price depends on themarket value of other goods (stocks, indices, currencies, rates).

Definition # 2

A derivative product is any contract which defines some rules formoney exchange , raw materials or the possibility of using anatural resource, conditioned to the realization of given events.




Elements of a derivative contract

Compulsory elements characterizing derivative products are:

market variables driving the future payments: underlyingassets

the expression linking underlying assets to the futurepayments: Payoff

payment structure and calendar dates where events will reveal

details about day counting conventions and holidaysadjustments




Why derivatives contracts are used?

Derivatives products are used for:

hedging from several risks categories (price volatilities, rates,exchange rates, inflation, weather conditions)

speculation and arbitrage

Derivative products goal is to hedge or to increment the exposureagainst some risk




Categories related to the market

ETD, Exchange-traded derivative: standard contracts traded andlisted on stock exchanges.

OTC, Over-the-counter: contracts which regulates exchangesbetween counter parties without intervention ofintermediaries.




Categories related to underlying asset nature

Stocks: the underlying is a stock or an index

Bond: the underlying is a rate

Currency: the underlying is an exchange rate

Raw material: the underlying is the raw data price

Inflation: the underlying is the inflation rate

Credit: events triggering payments are company defaults

On Transport: underlying is an index related to goods transportation

Weather: underlying can be temperature or rain levels (harvest,concerts, film shooting)




Contract types

Futures: two counterparts will exchange in the future a givengood at a price settled in advance

Options: one party has the right (but not the obligation) tobuy or sell a security or a commodity future at acertain reference price

Swaps: the two parties exchange (usually periodically)certain assets or cash flows over a given time-frame.




Derivative products : pricing and analysis

Difficulties related to the marketing to market and to the analysisof derivative products are:

the pronounced products heterogeneity;

lack of prices for over-the-counter contracts;

efficient derivatives valuation procedures writing requiresexpertise in several disciplines.

market data access.




Part II:

Modeling with Fairmat




Fairmat platform objectives

Allows complex analyses and assessments to be carried outrapidly

transparency in the process

Allows contracts unbundling (by bottom-up decomposition)

Model selection: test contract price/metric robustness byusing different theoretical models for the underlying stochasticprocesses.

Minimizes implementation effort and support a focus on thebusiness problem.




Fairmat : design objectives

Fairmat allows the replication of financial contracts with any paymentstructure through an environment which blends visual and algebraicconstructs, while decoupling financial contract specification from itsnumerical valuation.

Fairmat allows users to describe contracts by specifying:

the underlying assets (by specifying a model);

the payoff, the relationship — which is in general expressible interms of algebraic constructs which links payments to theunderlying assets;

the payment structure.

→ The procedures needed for pricing and other analytics areautomatically generated!




Fairmat : contracts modeling

Usually the following steps are performed to build up a model:

1 contractual parameters insertion→ Parameters&Functions section;

2 underlying asset modeling→ Stochastic Processes section;

3 Payments structure editing→ Option Map section;

4 payments payoff→ Option map element dialog windows;




Fairmat : contracts valuation

Usually valuation consists in the following steps

1 underlying assets model calibration→ (Automatic) with Fairmat data-link service, (Manual)with user defined parameters.

2 launch of the available analytics:

Pricing (also Fair Value Calculation)Greeks derivativesSensitivity and Impact AnalysesRisk Profile (distribution of future payoffs)...




Fairmat : syntax examples #1

Given a Vector A (which can be defined in the Parameter andSymbols section):

@A defines the reference to the entire vector A;

length(@A) function for obtaining the number of elements;

A[2]: access to the second vector element.




Fairmat : syntax examples #2

In Fairmat stochastic process are named V1,V1,...,Vn;

The value of the underlying asset V1 at a given date d isobtained by writing V1[d];

In the expression (V1 - K), where V1 is the underlying and K

is a constant, the date at which V1 is observed is implicit inthe context;

In general it possible to write any algebraic function linked tothe contractual parameters and to the models for theunderlying stochastic processes i.e:N * rate(D ;10; @V1 )*Cvg




Fairmat : Example #1




How we will proceed

We will model our contract using Monte Carlo simulation andthe Hull-White model in which the short-rate r is given by:

dr = (θ(t)− αt)dt + σdW

With Fairmat is then possible to model the same problemusing different models for the underling dynamics (i.e PelsserGaussian Squared Model, CIR or LMM) and also differentapproaches like the use of analytical formulations (Blackmodel).



PART III:

Pricing, analytics and solutions



Fairmat products overview (1/2)

Fairmat Academic is a reduced-functionality free version forperforming analyses for non-commercial purposes.It is also suitable for plug-in development.

Fairmat Data-Link is a on demand pricing service forFairmat Academic. Subscription periods are designed forletting you access market data and the remote valuationservices only when you need them, making Data-Link anaffordable SaaS solution for derivative pricing.



Fairmat products overview (2/2)

Fairmat Professional is a desktop version for modelingcontracts/projects and performing all related analyses such asValuation, Risk Management or IAS-39 hedge accounting.

Fairmat Server is an enterprise browser-based suite whichallows multiple users to perform on-line and scheduledvaluations/analyses/ and control on a number of contracts orportfolios.



Model calibration: example



Data-Link: market data service for Fairmat

Our goal is to extend the Fairmat offer to entities that do notown Bloomberg or Thomson Reuters Desks, by providing anall-encompassing product for financial product analytics.

Our solution allows you to perform valuations on your PC(respecting your privacy), because we do not have to hostsensitive or private information.



Data-Link: Features

Swap & FRA rates, Euro/Dollar futures, historicalLibor/Euribor.

Remote calibration (on the cloud) of interest rate models(Hull and White, Pelsser Gaussian Squared Model, LiborMarker Model) using Cap/Floor/Swap volatility matrices.

Closed form pricing (using the Black Model) using above data.

Data-Link is included in Fairmat Professional and availableseparately with Fairmat Academic.



Data-Link + Fairmat Academic

Alternative (for interest rate products valuations) to suiteslike Bloomberg and Thomson Reuters.

Ideal Tool for parties which occasional derivative pricing (i.e10 times per year) .

Privacy: pricing is made on the user PC. With Data-Link(Monte Carlo Simulation), Fairmat Srl will not host sensitivedata.



Fairmat : Example #2



Data-Link: access and costs

Use mode: on demand / short subscriptions, i.e. pay onlywhen you need market data!

Payment: electronic (trough credit card or wire transfer) formthe url www.fairmat.com/buy

Subscription length Cost

One day 39.00 e + VAT*One week 139.00 e + VAT*One month 399.00 e + VAT*

* VAT is applied only to Italian costumers.



Fairmat professional

Access to market data (Data-Link subscription included),Bloomberg Professional integration.

Additional Analysis (i.e Greeks Derivatives, Back Testing,Model Risk Analysis and others).

Additional Models: Inflation, Credit Risk Modeling, Equity.

Templates: availability of pre-loaded project templates (skipmodeling and start pricing immediately). In addition avaluation oriented GUI is available.

Access to commercial support and consulting onreplication products and financial modeling.

Cost: Yearly subscription (5900,00 e + VAT*) includessupport and market-data.

* VAT is applied only to Italian costumers.



Thanks for attending!

Remember that you can find additional resources onwww.fairmat.com/resources

For any questions just write [email protected]

Check out our upcoming webinars atwww.fairmat.com/webinars


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