Download Handout 1


Published on

  • Be the first to comment

  • Be the first to like this

Download Handout 1

  1. 1. Actuarial Skills in the Financial Markets Phil Kane – Director: Securitized Credit Casualty Actuarial Society – Chicago, IL November 2007
  2. 2. How do Investment Banks Organize Themselves? Investment Banking Markets Advisory and Relationship Securities & Derivatives - Sales and Management Trading DCM ECM Valuations Security Transactions Structuring Capital Structure Advice Cat Bonds Acquisition/Spin-Off Strategies ALM – Hedging Equity Research Secondary Insurance Policy Transactions XXX Securitizations Credit Research Risk Management Portfolio Credit Derivative Transactions and CDOs
  3. 3. CDOs as Credit Reinsurance? • Andrew event ≈ Subprime Mortgage event • Like Reinsurance, CDOs re-tranche risk portfolios to re-distribute it different risk appetites Catastrophe Risk Placement CDO Tranching Sleep Tight protection Super Senior Excess of Loss Senior Mezz Working Layer Junior Mezz Retention First Loss
  4. 4. CDOs : An Actuarial Role? • Much like Actuaries at the forefront of driving reinsurance transaction pricing and execution, • Structurers model and execute CDO transactions… • CDO pricing transparency recently questioned but limiting discussion to Credit Derivative CDOs, pricing models have become widely accepted and have actuarial analogues. • Risk premiums are typically arbitrage free; two way markets allow for the assumption that spreads are the best measure of default risk • In addition, ratings models usually have similar engine to pricing models, but rely on agency statistics rather than market inputs
  5. 5. Portfolio Credit Derivative Models • Default Risk ≈ Similar to insurance Event Risk If event happens, loss; no event, no loss • Spread Risk ≠ Insurance Premium Risk No Mark to Market for Insurance Premiums (yet….) Simple default models are typically based on binomial models for defaults; With correlations between 0 and 1, Gaussian Copulas have become standard model In Credit, as in the markets as a whole, individual risks are NOT independent
  6. 6. Marked to Market Risk • Trading desk hold statistical reserves for counterparty risks, “gap” risks, and model risks. These are typically monitored by Risk Management (analogue to Reserving Actuaries). • Trading Desks though are also exposed to Marked to Market as well, for example, basis risk on hedges: (using CDX example with recent levels:) CDX Tranches 30-100% [8.25]bps running 15-30% [14.5]bps running CDX Index 10-15% [32.5]bps running [61]bps 7-10% [73]bps running 3-7% [213]bps running 0-3% [18.55]% running = [75.9]bps running expected total Expected Basis approximately of [15]bps; can move though, +/- 5bps
  7. 7. Summary Many roles for dedicated Insurance Knowledge Actuarial Skills are directly transferable to Insurance Related Investment Banking. Life Actuaries have been successful migrated to ALM, asset sales, and securitization products. In markets, Portfolio Credit Derivatives behave in a many ways like Reinsurance In addition, to transact in the Credit Derivative Markets, one must firmly grasp Market to Market Risks as well. But, in general the modeling skills of an actuary can be successfully used in CDOs of all asset classes.
  8. 8. DISCLAIMER The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information. In addition we have no obligation to update, modify or amend this communication or to otherwise notify a recipient in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipients seek their own independent advice in relation to any investment, financial, legal, tax, accounting or regulatory issues discussed herein. Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothing contained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate or other market or economic measure. Furthermore, past performance is not necessarily indicative of future results. This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buy, any security, nor to enter into any agreement or contract with Deutsche Bank AG or any affiliates. Any offering or potential transaction that may be related to the subject matter of this communication will be made pursuant to separate and distinct documentation and in such case the information contained herein will be superseded in its entirety by such documentation in final form. Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSE, FINRA and SIPC, and its broker- dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates. This communication and the information contained herein is confidential and may not be reproduced or distributed in whole or in part without our prior written consent. © 2007 Deutsche Bank AG.