The Crisis And The Future Of Valuations


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The Crisis And The Future Of Valuations

  1. 1. StatPro Breakfast Seminar The Credit Crisis and The Future of Valuations
  2. 2. Agenda <ul><li>The Crisis and its Consequences </li></ul><ul><li>CAP – Complex Asset Pricing Service </li></ul><ul><li>Instruments </li></ul><ul><li>Data & Models </li></ul><ul><li>Frequency </li></ul><ul><li>Service </li></ul>pricing service
  4. 4. The Illusion of Liquidity <ul><li>As we observed during the credit crisis, when things go wrong, </li></ul><ul><li>liquidity disappears all of a sudden </li></ul><ul><li>BONDS </li></ul><ul><ul><li>Liquidity decreased dramatically, reducing the observed prices </li></ul></ul><ul><ul><li>As “peered” prices are still based on observed prices, the “peering” approach did not help </li></ul></ul><ul><li>RISK FACTORS-OTC DERIVATIVES </li></ul><ul><ul><li>For risk factors we mean market variables such as: Interest Rate Curves (e.g. IRS), CDS Indices, Single Name CDSs, etc. </li></ul></ul><ul><ul><li>Since risk factors such as IRS curves or CDS Indices concentrate liquidity on a single instrument, these instruments maintained their liquidity through the crisis. E.g. a 5y IRS is one instrument, instead you can have a multitude of 5y-bonds. When liquidity dries up, it is important to concentrate the remaining liquidity in one place </li></ul></ul><ul><ul><li>Another factor that protected liquidity in these OTC instruments vis-à-vis bonds is that they do not require an upfront cash payment for the Nominal amount </li></ul></ul>pricing service
  5. 5. The Big “De-leveraging” <ul><li>The disappearance and concentration of investment banks on one side and the de-leveraging process on the other imply that the reduction of liquidity is there to stay </li></ul><ul><li>BONDS </li></ul><ul><ul><li>Each bond is an instrument “per se” </li></ul></ul><ul><ul><li>Concentration and De-leveraging will reduce the amount of bonds with a liquid market </li></ul></ul><ul><li>RISK FACTORS-OTC DERIVATIVES </li></ul><ul><ul><li>The price of OTC derivatives contract is derived from a more limited set of OTC instruments (e.g. IRS have 20/25 instruments/maturity point per currency) </li></ul></ul><ul><ul><li>OTC derivatives do not require the cash liquidation of the Nominal </li></ul></ul><ul><ul><li>These factors will protect the liquidity of these instruments </li></ul></ul>pricing service
  6. 6. The Future <ul><li>Mark-To-Model approaches will become more and more popular </li></ul><ul><li>in the market </li></ul><ul><li>BONDS </li></ul><ul><ul><li>There will be less liquid bonds for which a market price exists and is reliable </li></ul></ul><ul><ul><li>The liquid bonds of today can become illiquid tomorrow as the de-leveraging process extends its reach </li></ul></ul><ul><ul><li>It is already essential to have a Mark-To-Model (MtL) price if no market price is available … </li></ul></ul><ul><ul><li>It will become essential to have a MtL price in addition to the Market Price </li></ul></ul><ul><ul><ul><li>For verification purposes </li></ul></ul></ul><ul><ul><ul><li>For spotting situations of loss-of-liquidity </li></ul></ul></ul><ul><li>OTC DERIVATIVES </li></ul><ul><ul><li>Having multiple source of valuation for OTCs is becoming the norm </li></ul></ul><ul><ul><li>Processes of verification of prices are and will become requested by regulators (e.g. UCITSIII) </li></ul></ul>pricing service
  7. 7. Agenda <ul><li>The Crisis and its Consequences </li></ul><ul><li>CAP – Complex Asset Pricing Service </li></ul><ul><li>Instruments </li></ul><ul><li>Data & Models </li></ul><ul><li>Frequency </li></ul><ul><li>Service </li></ul>pricing service
  8. 8. CAP - Complex Asset Pricing <ul><li>The StatPro service CAP covers instruments that need a “complex” valuation model and traded market data for being priced </li></ul><ul><li>OTC Derivatives </li></ul><ul><ul><li>Derivative contracts exchanged between two counterparties “Over-The-Counter” </li></ul></ul><ul><li>COMPLEX BONDS & CERTIFICATES </li></ul><ul><ul><li>Complex bonds and certificates may or may not be liquid. Normally they will be less liquid than traditional bonds. The main characteristic is that their pay-off can be – entirely or partially – replicated by other more liquid instruments and derivatives. Therefore a pricing model can be legitimately used for defining a “fair” price </li></ul></ul>pricing service
  9. 9. Agenda <ul><li>The Crisis and its Consequences </li></ul><ul><li>CAP – Complex Asset Pricing Service </li></ul><ul><li>Instruments </li></ul><ul><li>Data & Models </li></ul><ul><li>Frequency </li></ul><ul><li>Service </li></ul>pricing service
  10. 10. Asset Coverage <ul><li>Covered Instruments as of Today </li></ul><ul><ul><li>Interest-rate swaps (IRS) </li></ul></ul><ul><ul><li>Credit default swaps (CDS) on single names </li></ul></ul><ul><ul><li>Credit Default swaps (CDS) on baskets </li></ul></ul><ul><ul><li>Foreign-exchange (FX) Forwards </li></ul></ul><ul><ul><li>Equity-tranche CDOs on liquid indices (iTraxx and CDX) </li></ul></ul><ul><ul><li>Mezzanine-tranche CDOs on liquid indices (iTraxx and CDX) </li></ul></ul><ul><ul><li>Equity Options </li></ul></ul><ul><ul><li>Average (Asian) Options </li></ul></ul><ul><ul><li>Equity Variance Swaps </li></ul></ul>pricing service
  11. 11. Asset Coverage <ul><li>Q1 2009 </li></ul><ul><ul><li>- Equity Certificates </li></ul></ul><ul><ul><li>- FX Volatility Swaps </li></ul></ul><ul><ul><li>- FX Options </li></ul></ul><ul><ul><li>- CDS Swaptions </li></ul></ul><ul><ul><li>- BMA Swaps </li></ul></ul><ul><ul><li>- Equity Swaps </li></ul></ul><ul><ul><li>- CFDs </li></ul></ul><ul><ul><li>- Cross Currency Swaps </li></ul></ul><ul><ul><li>- Interest Rate Options: Cap/Floor, Swaptions </li></ul></ul><ul><ul><li>- Digital Cap-Floor </li></ul></ul><ul><li>From Q2 2009 Onwards </li></ul><ul><ul><li>- OTC Derivatives & Complex Bonds on request (Underlying Pricing Library today supports 230 pricing functions) </li></ul></ul>pricing service
  12. 12. Agenda <ul><li>The Crisis and its Consequences </li></ul><ul><li>CAP – Complex Asset Pricing Service </li></ul><ul><li>Instruments </li></ul><ul><li>Data & Models </li></ul><ul><li>Frequency </li></ul><ul><li>Service </li></ul>pricing service
  13. 13. Data <ul><li>12 Data Providers Today </li></ul><ul><ul><li>Traditional Data Providers </li></ul></ul><ul><ul><li>Specialized Data Providers </li></ul></ul><ul><ul><li>Investment Banks </li></ul></ul><ul><ul><li>Inter-Dealer Brokers </li></ul></ul><ul><li>Data </li></ul><ul><ul><li>Equity & Other Prices </li></ul></ul><ul><ul><li>Implied Volatilities (Equity, FX, IR, CDS) </li></ul></ul><ul><ul><li>Inflation Swap Curves </li></ul></ul><ul><ul><li>FX Rates </li></ul></ul><ul><ul><li>Interbank Interest Rate Curves </li></ul></ul><ul><ul><li>Corporate Asset swap Indices (Investment grade and High Yield) </li></ul></ul><ul><ul><li>Credit Default Swap Curves </li></ul></ul><ul><ul><li>Implied Base Default Correlations </li></ul></ul><ul><ul><li>Municipal Swaps </li></ul></ul><ul><ul><li>Cross-Currency Basis Swaps </li></ul></ul><ul><ul><li>… </li></ul></ul>pricing service
  14. 14. Models <ul><li>QuantLib was born at StatPro! </li></ul><ul><ul><li>QuantLib ( is the building block of our risk and pricing services </li></ul></ul><ul><ul><li>QL is the most successful open-source pricing library for financial instruments in the world (10,000 downloads) </li></ul></ul><ul><ul><li>Created in November 2000 at StatPro Italia (then RiskMap) by Ferdinando Ametrano, Luigi Ballabio and Dario Cintioli </li></ul></ul><ul><li>QuantLib 2 </li></ul><ul><ul><li>Built around QuantLib </li></ul></ul><ul><ul><li>Adds Models and Pricing Functions to QuantLib </li></ul></ul><ul><ul><li>Sold separately as a pricing library </li></ul></ul><ul><li>Model Coverage </li></ul><ul><ul><li>Extensive Coverage including: </li></ul></ul><ul><ul><ul><li>Interest Rate Models (Single Factor and Multi-Factor) </li></ul></ul></ul><ul><ul><ul><li>Gaussian Copula </li></ul></ul></ul><ul><ul><ul><li>Other Credit Models </li></ul></ul></ul><ul><ul><ul><li>Prepayment Models </li></ul></ul></ul><ul><ul><ul><li>… </li></ul></ul></ul>pricing service
  15. 15. Agenda <ul><li>The Crisis and its Consequences </li></ul><ul><li>CAP – Complex Asset Pricing Service </li></ul><ul><li>Instruments </li></ul><ul><li>Data & Models </li></ul><ul><li>Frequency </li></ul><ul><li>Service </li></ul>pricing service
  16. 16. Pricing Frequency <ul><li>Today </li></ul><ul><ul><li>Daily </li></ul></ul><ul><li>Q3 2009 </li></ul><ul><ul><li>Intra-Day Multi-Run </li></ul></ul>pricing service
  17. 17. Agenda <ul><li>The Crisis and its Consequences </li></ul><ul><li>CAP – Complex Asset Pricing Service </li></ul><ul><li>Instruments </li></ul><ul><li>Data & Models </li></ul><ul><li>Frequency </li></ul><ul><li>Service </li></ul>pricing service
  18. 18. Solution <ul><li>SaaS </li></ul><ul><ul><li>True Software-as-a-Service Application (Web 2.0) </li></ul></ul><ul><li>Instruments Terms & Conditions </li></ul><ul><ul><li>Can be loaded by the Client via https or FTP </li></ul></ul><ul><ul><li>Can be loaded by StatPro </li></ul></ul><ul><li>Unique Pricing Challenge Process </li></ul><ul><ul><li>3 Levels of Pricing Challenge, first is automatic </li></ul></ul>pricing service
  19. 19. Price Challenge <ul><li>Once an outlier is identified, a three-step approach is usually performed </li></ul><ul><ul><li>1. Control of Terms & Conditions: most discrepancies come from wrong input </li></ul></ul><ul><ul><li>2. Control of the Data used: the underlying data set is made available </li></ul></ul><ul><ul><li>Validation of the model: if stage 1 & 2 did not explain the difference, this step evaluates how far the pricing models used between providers explain the difference </li></ul></ul><ul><li>To perform this task, time & reactivity are of essence </li></ul><ul><li>StatPro Pricing Service is in line with the above standard </li></ul>The purpose of a Price Challenge is to understand the origin of a difference between pricing sources The Price Challenge allows you to act based on reliable information pricing service
  20. 20. Price Challenge <ul><li>Price Challenge Level 1 – Via web & automatic E-mail </li></ul><ul><li>Click a button and an e-mail is produced with: </li></ul><ul><ul><ul><ul><li>Asset Terms & Conditions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Description of Pricing Models & Functions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Values of the Risk Factors used for that Price on that Day </li></ul></ul></ul></ul>Clients need to access the underlying data and models to set up the escalation process pricing service
  21. 21. Price Challenge GUI pricing service
  22. 22. Price Challenge Output pricing service
  23. 23. Transparency <ul><li>Price Challenge Level 2 – Access to StatPro Data Support Team </li></ul><ul><li>A member of the support team reproduces live the pricing process for analysis </li></ul><ul><ul><ul><ul><li>Each Pricer has an Excel interface with a pre-defined Data Model Structure </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Ability to shock the risk factors and look for explanations </li></ul></ul></ul></ul><ul><ul><ul><ul><li>One can overwrite Data independently </li></ul></ul></ul></ul><ul><li>=> New calculated results with modified input numbers are made available </li></ul>Production of documentation for all third parties involved pricing service
  24. 24. Excel Add-Ins pricing service
  25. 25. Transparency <ul><li>Price Challenge Level 3 – Quantitative Consulting </li></ul><ul><ul><ul><ul><li>Industry leading expertise </li></ul></ul></ul></ul><ul><ul><ul><ul><li>In depth analysis of the more complex issues </li></ul></ul></ul></ul><ul><ul><ul><ul><li>On a consultancy basis </li></ul></ul></ul></ul>In case of further issues with the OTC counterparty, a direct access to a Quant Desk is provided pricing service
  26. 26. The Price Challenge Process Access web transparency procedure <ul><li>Enter request </li></ul><ul><li>Client code </li></ul><ul><li>Instrument code </li></ul><ul><li>Evaluation date </li></ul><ul><li>Get via E-mail the answer from SPS </li></ul><ul><li>Terms & Conditions of the asset </li></ul><ul><li>Pricing model description </li></ul><ul><li>Risk factors used with values </li></ul>Client still troubled Support Level 2 / 3 Troubled Client - Support Level 1 * Excel Simulation * Quants Advice pricing service
  27. 27. Pricing Service Demonstration StatPro Pricing Service is built for Independancy Transparency Coverage pricing service
  28. 28. Thank You Dario Cintioli – Global Head of Risk StatPro Group Carsten Steimer – Geschäftsführer StatPro (Deutschland) GmbH