Algo Market Analytics provides a scenario-based approach to risk management that delivers accurate and actionable results. For over ten years more than 150 banks and financial institutions around the world have applied Algo Market Analytics within demanding environments to deliver risk insights that support their business strategies. With intuitive interfaces and investigative tools, Algo Market Analytics is accessible to a wide range of end users, and sets the standard for financial risk management. ALGO MARKET ANALYTICS Measure, manage and optimize market risk across the enterprise with a leader in risk analytics
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Algo Market Analytics provides a scenario-based approach to risk management that delivers accurate andactionable results. For over ten years more than 150 banks and financial institutions around the world haveapplied Algo Market Analytics within demanding environments to deliver risk insights that support theirbusiness strategies. With intuitive interfaces and investigative tools, Algo Market Analytics is accessible to awide range of end users, and sets the standard for financial risk management.
ALGO MARKETANALYTICS
Measure, manage and optimize market risk acrossthe enterprise with a leader in risk analytics
Algo Market Analytics provides firms with the fundamentals of scenario-based riskmanagement, giving financial institutions a leading solution for measuring andmanaging market risk across asset classes and geographies. With broad instrumentcoverage and vast libraries of pricing functions and statistical models, firms cancreate simulations for testing and optimizing their strategies.
Algo Market Analytics applies the award winning Mark-to-Future framework thatoffers firms a solid foundation for capturing the interactions between risk types andmanaging risk as an integrated system across market, credit and liquidity risk.
Financial risk management is more than an end number - it is theprocess of understanding how data is transformed by models intobusiness insights that drive better decisions. Fundamental changes inrisk management approaches are being led by firms that recognize thebusiness benefits of a rigorous and holistic approach to risk and byregulators that are demanding a new level of transparency.
Algo Market Analytics is leading the industry with new developments inadvanced risk analytics, valuation methodologies and scenariogeneration techniques. The award winning Mark-to-Future architectureunderlying Algo Market Analytics is asset class and risk factor agnostic,enabling the solution to span all holdings and investment strategies oflarge multinational trading operations.
Algo Market Analytics offers accepted approaches for portfoliooptimization, back-testing, limits management, and on-demandscenario-based simulations. To accurately identify trends, Algo MarketAnalytics is configured with data services that categorize current andhistorical securities information on every risk factor used for scenariogeneration, model calibration, and variance/covariance generation.
The interactive interfaces and reporting options of Algo Market Analyticscan be customized by individual users to efficiently deliver risk analysisthat meets the diverse requirements of different roles. This tailoredapproach facilitates effective communication across all levels of theorganization, providing actionable insights to decision makers withinsenior management, risk management, and the front office.
Algo Market Analytics helps to enable better, faster decision support forfirms to manage market risk, and establishes the foundation required tosupport ongoing business needs as risk management approaches areexpanded to include credit and liquidity risk across the enterprise.
The standardfor scenariobased risk
management
RISK INSIGHTS THAT PEOPLECAN ACT ONAlgo Market Analytics provides banks with real-time riskinsights. Risk managers and traders can define what-ifscenarios and monitor limits across all business lines.
Middle office Risk Managers can create automated dailyreports that include stress test results with a variety ofaggregations on mark-to-market measures and theimpacts on VaR. The award-winning Mark-to-Futuremethodology for simulation-based risk management runsfull forward valuations requiring no constrainingassumptions or short cuts. Since Algo Market Analyticsdoes not require analytical approximations of risk, theapproach helps firms to meet regulatory requirements forthe Basel Internal Model Approach (IMA), including VaR,Stressed VaR, Incremental Risk Charge (IRC), and debt &equity specific risk.
Front office traders can assess historical replays and thepotential P&L impact of user-specified risk factormovements including shocks to interest rate curves, equityindices, and volatility surfaces. With intraday updates ofmarket data, traders can run real-time reports duringvolatile market conditions and apply insights fromsensitivities to rebalance positions and maintain hedges.Options for more effective hedging strategies can beconstructed and compared with instrument level analyticssuch as key rate durations, key spread durations, convexityrisks, industry beta exposures, risk factor exposures, andGreeks.
A working approach to understanding risk Designed to produce a robust, consistent, and accurateview of the future, the scenario-based methodology ofAlgo Market Analytics provides an integrated view of riskacross multiple asset classes, instrument types, and riskfactors, spanning multiple countries and currencies.Risk measures generated by Algo Market Analytics areaggregated from distributions of simulated valuationsthrough time across a wide range of scenarios. Theresulting array of valuations generated across multipledimensions, supports in-depth analysis to betterunderstand the risks within any portfolio. Users can compare VaR results day over day to look forshifts and investigate how positions have beenimpacted by drilling down through hierarchies andopening context specific views. At each level, a user has options for performing further analysis such ashighlighting changes in market data, graphingnumerical sensitivities, performing custom stress tests,running historical replays and tabulating probabilisticrisk measures.
Because every valuation depends upon the underlyingrisk factors used to generate the scenarios at each timestep. Algo Market Analytics also includes a sophisticatedmodeling environment for calibrating risk factors anddefining risk factor processes.
Scenarios
Instruments
Time Steps
Mark-to-Future: the building blocks of risk
+Industry-Leading Risk Management
Over 150 banks and financial institutions around theworld depend on Algo Market Analytics.
Algo Market Analytics provides firms with thefundamentals of measuring risk and reward for risk-informed decision making, and offers a wide range ofsolutions through extension packages.
Options to meet business needs
Dynamic strategies – Improve hedge effectiveness andlower hedging costs with risk management tools foroptimizing trading strategies. Simulation results giveinsights on what is best to trade, how much, and when,based on multiple market scenarios that outline thepotential profit and loss impacts.
Optimization – The patented scenario-based optimizationframework allows firms to replicate the characteristics oftheir enterprise portfolio with a small set of liquidinstruments. This gives banks an efficient approach tobetter understand their risk profile, and supports planningdiscussions with Chief Risk Officers and the executivemanagement to proactively develop hedging strategiesthat can be quickly put in place during periods of marketturmoil.
Comprehensive picture of risk – Construct an enterpriseview of risk by integrating the building blocks of AlgoMarket Analytics with other Algorithmics products likeAlgo Credit Exposure, Algo ALM, and Algo Liquidity Risk tomeet sophisticated business challenges.
Concentration risk profile report
Absolute Risk report
P&L Distribution vs Monte Carlo Scenarios
Integrates the front and middle office foractive management of riskOn-demand risk measures have become a standardrequirement from risk managers and front office traders.Algo Market Analytics applies award winningcomputational speed to perform what-if analysis onportfolio impacts from potential trades or new economic situations.
Provides comprehensive instrumentcoverage and model supportTo address the unprecendented growth of thederivatives market, Algo Market Analytics includesinstrument coverage for more than 20 differentgeographic markets and over 400 financialinstruments including fixed income, foreignexchange, equity, credit, energy, commodity, andderivatives markets. It also includes support forstructured products such as MBS/CMO/ABS/CMBS.Algo Market Analytics features an extensive libraryof pricing models that can be adapted andexpanded with Risk++, an open language forscripting pricing functions, and can support rapidintegration of third party pricing models already inuse by firms. Advanced analytics and scenariogeneration techniques for stress testing over multi-period stress events is also supported.
Ongoing support for new challengesLed by one of the industry's largest group of riskprofessionals, Global Services and Support teamincludes financial engineers, integration specialists,and project managers. Algorithmics’ support teamsutilize a reliable engagement methodology to assistclients in the implementation of Algorithmics’solutions, and help clients adapt their existing risksystems to meet new challenges.
KEY FEATURES AND BENEFITSUnderstand sources of riskThe advanced scenario-based Mark-to-Futureframework of Algo Market Analytics provides financialinstitutions with a consistent forward-looking pictureof risk. This approach to risk and reward analysis helpsfirms to mitigate unexpected losses and maximizereturns through more informed business decisions.
Adapts to evolving business needsAlgo Market Analytics is designed to meet the growingbusiness needs of firms as they emerge in the market. The data architecture captures and consolidatespositions across the enterprise, with a highly scalabledata handling capacity. Algorithmics’ industry leadingperformance is based on a multi-threading approachthat can be distributed horizontally and vertically on toa single multi-processor server or within gridcomputing farms.
Existing installations can be quickly reconfigured toinclude new asset classes, business lines, investmentstrategies, and risk methodologies without interruptingexisting workflows or disrupting results.
Promotes transparency and helps reduceregulatory capital requirementsThe analysis and risk reporting extracted throughAlgo Market Analytics promotes dialogue betweenbusiness lines and senior management regardingthe key drivers of risk, and potential strategies thatcan be initiated to manage exposures. Thefunctionality and reporting framework of AlgoMarket Analytics has enabled many financialinstitutions around the world to free up significantcapital reserves by achieving regulatory approval oftheir internal models on market risk and specific risk.
COMPREHENSIVE PRODUCT COVERAGEEffective risk-based decisions rely on risk measures that address both individual positions and theirinteractions within a broader portfolio. Accurately valuing all open positions within a single frameworktherefore becomes an important step towards measuring the market, credit, and liquidity risks that thosepositions create or mitigate. Algorithmics provides a number of alternatives for valuing financialinstruments to ensure that the entire book may be incorporated into the risk measurement process. Thisprovides firms with the necessary flexibility to appropriately model any type of position within theirportfolio, from exotic, one-off deals to high-volume vanilla transactions.
EXTENSIBLE…
Stochastic Pricing Models are a specialclass of standard valuation models thatfacilitate the pricing of exotic derivatives(interest rate, foreign exchange, or equity)using a Monte Carlo approach. Clients canselect from a payoff function or specifytheir own using a straightforward C++interface.
Dynamic Expressions provide flexibility indefining valuation functions for non-financial products and risk (e.g., physicalassets) by allowing clients to specifyarbitrary functions of risk factors andinstrument attributes. Extending theexample, consider project finance, whereone might vary the value of the underlyingproject using a formula based onmacroeconomic factors or commodityprices. In addition to standard functions,dynamic expressions also allow morecomplex functions written in Python to beincorporated.
Synthetic Products allow multiplecomponent products to be grouped into asingle transaction or product. For example,two swap legs may be modeledindividually then combined into a syntheticproduct to facilitate the reporting of therisk measures and validation against thesource system.
COLLABORATIVE…
Custom Pricing Extensions are used bymany of our clients to create customizedvaluation functions for non-standardproducts or to incorporate in-house pricingmodels. There are three options for codingan extension: Risk++ (a set of C++libraries), Python (using the Pythonlanguage to code functions via scripts),and RiskScript, a variant of VBA. Theseprovide a range of choices depending ondesired performance, flexibility, and timeto market. In all cases, the terms &conditions are loaded in the same manner.
External Pricing, also known as OpenMtF, allows clients to import their ownsimulation results, calculated with theirown models. Both a generic interface anda specialized MS Excel plug-in areavailable. Open MtF provides for theexport of scenarios on risk factors acrosstime (e.g., the EUR interbank zero curve).These scenarios support valuation oftransactions by an external engine. Theimport of the resulting values acrosstime/scenario is enabled by Open MtF. Thevalues are then combined with thoseevaluated using other techniques toproduce a complete picture of risk.
PRACTICAL…
Grid Evaluation is most effective whenthe value of a transaction is related to onlyone or two risk factors, but where thevaluation itself is time-consuming orintractable. Each transaction is evaluatedacross a grid of risk factor values toproduce a look-up table. This table isloaded into the system as part of the terms& conditions of the transactions. Duringsimulation transaction values from thetable are interpolated as required. Thistechnique is most commonly used formarket risk purposes.
Sensitivity-Based Evaluation is used toapproximate the behavior of instrumentswhen complete terms & conditions and/orevaluation functions are unavailable. Thisapproach may be often used in the initialphases of a project, with a view toreplacing it with a model-based approachat a later date. This technique is mostcommonly used for market risk purposes.
Portfolio Replication reduces large,complex portfolios to a manageablenumber of representative instruments forrisk measurement purposes. For example,a block of life insurance policies may beevaluated against one hundred plausiblescenarios. These scenarios and thecorresponding values of the block feed anoptimization algorithm. It produces asmaller portfolio of financial instrumentsthat replicates the risk profile of theoriginal larger portfolio. This replicatingportfolio is used as a proxy of the originalportfolio for the purposes of riskmeasurement and benchmarking.
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Standard Models are the mostcommonly used valuation methods.Terms & conditions are specified foreach product type and loaded into thetransaction database. A standardfunction for valuation and simulationof the trade, allowing settlement (cashand physical) and through-timevaluation to be realized; sensitivities,cash flows, and other attributes arealso calculated.
In many cases, model calibrationalgorithms are also provided, ensuringconsistency and facilitating validation.
The flexibility within the Algorithmicsframework means that clients canmodel a wide variety of products thatexist in the market today. Thefollowing are examples of productssupported by Algorithmics andactively used by our clients.
INTEREST RATE PRODUCTS
Algorithmics offers flexible valuationmethodologies for a wide range of interestrate products. Users can build fixedincome instruments from terms &conditions or specify paymentsindividually. Pricing algorithms includediscounting, numerical methods, lattices,and Monte Carlo. Supported interest rateevolution processes include forward-basedpricing, normal, Hull-White, two-factorHull-White, Amin-Jarrow, and Black-Karasinski.
Equities may be modeled directly ormodeled using a multi-factor CAPMapproach. On this basis, a wide variety ofoptions models are available, includingclosed form, numerical methods, lattices,and Monte Carlo. Supported evolutionprocesses include GBM and Heston.
Spot, Forwards, Futures, SwapsCommon/Preferred StockEquity IndicesAmerican Depositary ReceiptsEquity ForwardsEquity Index FuturesEquity Index SwapsVariance/Volatility SwapsForward Volatility AgreementsCorrelation Swaps
For synthetic CDO, three types of valuationprocedures are provided: Analytic1,Convolution2, and Monte Carlo Simulation.Moreover, Algorithmics provides themeans to estimate the inputs into themodels: base correlation, hazard curves,and spreads are all estimated from marketquotes.
Multi-NameSynthetic CDOIndex CDS (CDX and iTraxx)Index Tranches (CDX and iTraxx)Bespoke CDOTranches1st-to-Default, N-to-Default Baskets
Model CalibrationHazard Rate or Spread Curve Index CDS (CDX and iTraxx)
GENERIC DERIVATIVES
Algorithmics’ models exploit thecommon features of products that havea variety of underliers. Forward-basedmodels can be used with the followingproduct types: FX, Bonds, Commodities,EDF and FFF, Equities and MarketIndices, Baskets, Bond Futures, etc.
Forward BasedAsianAsian CliquetsAsian ForwardsForwardsFuturesForward StartOptions on Futures EuropeanAmericanQuantos
Single BarrierEuropean Up & In, Up & Out, Down & In, Down & OutCash-or-Nothing Binary One-TouchCash-or-Nothing Binary No-TouchCash-or-Nothing Digital One-TouchCash-or-Nothing Digital No-TouchAsset-or-Nothing Binary One-TouchAsset-or-Nothing Binary No-TouchAsset-or-Nothing Digital One-TouchAsset-or-Nothing Digital No-TouchQuanto Barrier
Double Barriers European Double Knock-out/Knock-inCash-at-Expiry-or-Nothing BinaryOne-TouchCash-at-Hit-or-Nothing Binary One-TouchCash Binary No-TouchCash Digital No-TouchCash-or-Nothing Digital One-TouchAsset-at-Expiry-or-Nothing Binary One-TouchAsset-at-Hit-or-Nothing Binary One-TouchAsset Binary No-TouchAsset Digital No-TouchAsset-or-Nothing Digital One-TouchWindow BarriersQuanto Barrier
BANKING BOOK PRODUCTS
A variety of functions support theinclusion of banking book and retailproducts, either individually or as cohortgroups.
CommitmentsFixed Rate LoansFloating Rate LoanLines of Credit Letters of CreditGuaranteesReceivablesDemand DepositsRetail Bonds (amortizing and prepaying)
REGIONAL MODELS
As a vendor with an international clientbase, Algorithmics empowers users tomodel precisely instruments in differentregions. Standard models arecomprehensive, but additionalspecialized features are available forparticular regions.
Australian ModuleExchange Bond FuturesFutures Exchange Bank Bill FuturesOptions on Exchange Bond FuturesOptions on Exchange Bank Bill Futures
Brady Bond ModuleBrady BondsBrady Bond Options (European, American)
1 The Analytic valuation follows Iscoe and Kreinin: Pricing andValuation of CDOs, which provides the closed-form solutionof the expected Tranche Loss.
2 The Convolution form follows Hull and White: Valuation of aCDO and an nth to Default CDS without Monte CarloSimulation, which describes the convolution method tocompute the distribution for the number of defaults in theunderlying asset pool.
About Algorithmics, an IBM CompanyAlgorithmics is a leading provider of risk solutions. Financial organizationsfrom around the world use Algorithmics' software to help them makerisk-aware business decisions. Algorithmics' analytics and advisoryservices assist firms in taking steps towards maximizing shareholder valueand meeting regulatory requirements. Supported by a global team of riskexperts based in all major financial centers, Algorithmics offers awardwinningsolutions for market, credit and operational risk, as well ascollateral and capital management.
