Infinity Derivatives™ v7.

0
Trader Guide to Risk Analysis

CONFIDENTIAL

© Copyright 1997 Infinity Financial Technology, Inc.

Infinity Derivatives v7.0 Trader Guide to Risk Analysis, First Edition
December 1997

Notice
Infinity Financial Technology, Inc. (Infinity) reserves the right to make changes in this publication at any time
and without notice. Infinity makes no warranties, express or implied, in this publication. In no event shall
Infinity be liable for any indirect, special, incidental or consequential damages arising out of purchase or use
of this publication or the information contained herein.

Copyright
Unpublished work, Copyright Infinity Financial Technology, Inc. (“Infinity”). This publication and the soft-
ware described within it (“Materials”), constitute proprietary and confidential information of Infinity and its
suppliers.

The Materials (and any information or material derived therefrom) may not be reproduced or used, and may
not be disclosed or otherwise made available to any person, in whole or in part, except in accordance with a
written agreement with Infinity or as otherwise expressly authorized in writing by Infinity.

Licenses and Trademarks

Infinity, the Infinity logo, Fin ++, Infinity Platform, Infinity Derivatives and Infinity RiskView are registered
trademarks or trademarks of Infinity Financial Technology, Inc. in the United States and foreign countries. All
other company or product names are trademarks or registered trademarks of their respective holders.

Infinity Technical Support

If you wish to contact Infinity's technical support staff, you can use either the Infinity's Client Services web
site or telephone support. The Client Services web site allows you to enter technical support requests, check
the status of your requests or download up to the minute information. The URL for Infinity's Client Services
web site is:
http://www.infinity.com/client_services/
You will need to have a password to use this site. If you do not have a password, contact your account manager
or Infinity representative for one.
If you wish to reach Headquarters Technical Support via telephone, please contact your local Infinity represen-
tative. When your local office is closed, please call Headquarters Technical Support at (650) 940-6100.

Manual updated by Cathy Boissy and Sylvia Junn.

Infinity Financial Technology, Inc.

640 Clyde Court
Mountain View, CA 94043 USA
Table of Contents

Chapter 1: Introduction to Risk Analysis

Risk Analysis 1
Scenario Builder 2
Release Notes 3
About this Manual 4
Alert Symbol 4
Logging into Trader 5
Logging into Scenario Builder 5
Infinity Technical Support 6

Chapter 2: Risk Analysis Reports

Generating Reports 9
Mark to Market 17
Sensitivity Reports 20
Cash Flow Projection 30
Direct Perturbation Hedge 34
Partial Differential Hedge 44
Option Exercise 47
Option Greeks 50
Greeks PV01 53
Rate Reset 56
Profit and Loss 60
Profit and Loss Decomposition 72
Accrual Profit and Loss 76
Chapter 3: Scenario Builder

Scenario Builder Overview 87

Using Scenario Builder 87
Modes of Operation 89
Scenario Builder’s Main Window 91
Defining and Modifying Scenarios 93
Process Menu Commands 95
Progress Monitor 97
Error Logs 98

Chapter 4: Risk Analytics

Partial Differential Hedge (PDH) 99

PDH — Multiple Use of Single Instruments 101
Hedge Recommendations — Futures Contracts 102
Projected Flows 103
Profit and Loss Decomposition 104
 Chapter 1

Introduction to Risk Analysis

Risk Analysis
The Infinity Trader application offers traders and risk managers powerful
risk analysis tools. It provides a broad range of analytical and reporting
capabilities to minimize risk exposure for multi-currency, multi-
instrument portfolios. Trader enables users to analyze risk for a wide
variety of securities including swaps, caps, floors, FRAs, FX, bonds,
futures and money markets. Trader provides flexibility in defining a
portfolio for consolidated risk analysis across a user-defined set of trades.

Flexible portfolio Trader allows users to define a portfolio as a specific group of securities
definition or as a set of relative parameters. For example, a portfolio could be
defined as all swaps and FRAs transacted with a specific counterparty.
Every time a new swap is transacted with the designated counterparty, it
would automatically be included in the portfolio. A portfolio can be as
small as an individual trade or as large as the entire collection of
transactions in the database.

Consolidated risk Trader interacts directly with the Infinity Platform database, a central
analysis repository for all transaction data residing on an SQL RDBMS.

Trader analyses Trader provides a number of risk analyses including mark to market,
sensitivities, partial differential hedge, direct perturbation hedge, cash
flow projections, rate reset, option Greeks, Greeks PV01, option exercise,
profit & loss, profit & loss decomposition and accrual profit and loss.
Multiple interest rate curves, volatility curves and volatility surfaces can
be assigned, ensuring that Trader’s various analyses address the many
sources of risk in a multi-instrument, multi-currency portfolio.

• Mark to Market: The Mark to Market delivers the NPV for

any set of trades.
• Sensitivities: Sensitivities to a variety of shifts in curves and
volatility surfaces can be analyzed. Shifts from standard
parallel shifts to custom changes can be easily modeled.
• Cash Flow Projections: The Cash Flow Projection allows
users to project cash flows for both fixed- and floating-rate
securities. Trader calculates the forward rates from the

Confidential — Infinity 7.0 Risk Analysis 1

 selected curves and projects cash flows for floating-rate
securities based on those rates.
• Partial Differential Hedge: The Partial Differential Hedge
(PDH) reports the change in NPV resulting from a user-
defined change in each underlying instrument of the curves.
Trader recommends hedge for each instrument to offset the
sensitivity.
• Direct Perturbation Hedge: The Direct Perturbation Hedge
(DPH) reports the change in NPV resulting from a user-
defined change in a set of hedge vehicles.
• Option Greeks: The Option Greeks provides a series of
option measures (delta, gamma, theta, vega) for all option
type instruments (cap/floor, future option, bond option,
swaption). The option measures are reported by trade.
• Greeks PV01: The Greeks PV01 provides a series of Greeks
NPV measures (delta, gamma, theta, vega) for all instruments
and user-defined shifts in curves and volatilities. The Greeks
values are reported by trade.
• Option Exercise: The Option Exercise reports all option type
instruments which expire within a user-defined period for
user-defined time buckets.
• Profit and Loss: The P&L is a basic report in which mark to
markets are done on two user-defined dates and the
differences are computed. The mark to markets are fixed by
an independent EOD process.
• Profit and Loss Decomposition: The P&L Decomposition
provides an explanation of the daily profit and loss, dividing
the results into single components such as time decay, market
data and trade status modification.
• Rate Reset: The Rate Reset report displays the sensitivity of
a portfolio to rate settings in the future, listed by date.
• Accrual Profit and Loss: The Accrual P&L provides the
profit and loss on cash flows, calculating for a user-defined
period: realized cash, earned accrual value and unearned
accrual value. The accrual values are fixed by an independent
Accrual EOD process.

Scenario Builder
Trader’s sister application, Scenario Builder, allows the user to create and
execute, in a batch fashion, customizable risk scenarios. The analyses
available in Trader can be included in the batch scenarios.

2 Introduction to Risk Analysis Trader Guide to Risk Analysis

 Release Notes
With version 7.0, the Risk Manager application has been integrated with
Trader. The risk analyses are now available in Trader and Scenario
Builder. Both Trader and Scenario Builder allow all reports to be saved to
the database.

Each report has its own set of parameters, defined in a specific screen that
is displayed when you invoke a report. There is no longer a central screen
where you define the parameters for all the reports.

The Cash report has been integrated to the Cash Flow Projection report.

The Ladders reports have been integrated to the DPH report. You can
display the Ladders information using the DPH report type
“Sensitivities”.

The DPH report provides a new perturbation methodology: Principal

Component. You will find details on this methodology in the Infinity
white paper Direct Perturbation Hedging Analytics.

In the Greeks PV01 and P&L Decomposition reports, there is a new

optional way to move curves forward: “Move curves and valuation date
forward”. The interest rate curves are moved forward by “walking up the
forward curve”; the curves are altered by a relative discount factor
calculation so that implied forward rates on fixed forward dates are the
same on the original and the moved curves. Discount factors on relative
maturities change under this method.

A new report “Accrual PNL” provides the profit and loss on cash flows,
calculating for a user-defined period: realized cash, earned accrual value
and unearned accrual value.

The report “Bond Spread to Zeros” will be available in a future version.

Confidential — Infinity 7.0 Release Notes 3

 About this Manual
This manual presents a comprehensive view of Trader’s risk reports and
Scenario Builder, from the user interfaces and command features to the
methods of risk analysis.

Chapter 1 “Introduction to Risk Analysis” provides an introduction to the features

and functionality of the risk analyses capabilities, as well as an overview
of this manual.

Chapter 2 “Risk Analysis Reports” documents the risk reports. Performing the
reports is a four-step process:

1. Select a base counterparty. Select a base counterparty in

Trader’s main window. If the base counterparty doesn’t match
with the set of trades that you want to analyze, the reports will
be empty.
2. Define a set of trades. Create a portfolio to define the set of
trades you want to analyze. The Infinity Trader Reference
Guide covers portfolio definition.
3. Define a valuation model. The valuation model specifies the
pricing models and the curves used to price the trades of the
selected portfolio. The Infinity Trader Reference Guide covers
the valuation model definition.
4. Generate a report. Select an analysis from the Analysis menu
in Trader’s main window. The PDH and DPH reports are also
available in the trade worksheets. With your set of trades and
your valuation model, Trader generates a report that displays
the results of the analysis. Chapter 2 describes report
generation.
Chapter 3 “Scenario Builder” documents the Scenario Builder application. A
separate application from Trader, Scenario Builder applies the same
analytical methods but provides the ability to generate multiple reports as
part of a single batch process.

Chapter 4 “Risk Analytics” explains some of the mathematical algorithms

underlying risk analysis.

The Infinity Financial Analytics Glossary provides further details on the

algorithms related to risk analysis.

Alert Symbol
The alert symbol (shown at left) is used throughout the manual to indicate
important points that should not be ignored.

4 Introduction to Risk Analysis Trader Guide to Risk Analysis

 Logging into Trader
Please refer to the Infinity Trader Reference Guide.

Logging into Scenario Builder

Scenario Builder can be started independently or from the infTools
application, a launching utility. If you launch Scenario Builder without
using infTools, the login window will be displayed:

The Infinity Login

window

To connect to a server or database, enter the information in the relevant

fields. Press the <Tab> or <Enter> key to move between fields in the
window or click on the desired field. To complete the login, press <Enter>
after all the fields are filled or click on the “OK” button.

Server field Type the name of the database server you will use for this session of
Scenario Builder. If you are unsure of the server’s name, contact your
system administrator.

Database field Type the name of the specific database you will be using for this session
of Scenario Builder. Again, if you are unsure of the database’s name,
contact your system administrator.

User field Type your assigned user name. Your database system administrator is
responsible for adding user names to the system.

Password field Enter your assigned password. Your database system administrator
assigns initial passwords for the system, but only you know your official
password. To protect your password, the field displays only asterisks as
you type the letters of your password.

Exiting the Click the OK button or press the <Enter> key when all the data-entry
login window fields are filled. If the information is correct, then a connection with the
database will be established and the Scenario Builder Main window will
be displayed on your monitor.

Confidential — Infinity 7.0 Logging into Trader 5

 Incorrect login If the login is incomplete or invalid, an error message appears.

The Incorrect Login

window

Click on the OK command button, then update the incorrect information

in the login window. If repeated attempts to gain access to the database do
not succeed, see your system administrator to verify that your login
information is up to date.

Be aware that three failed login attempts will disable your account.

Info command To check the version number of your installation of Scenario Builder,
press the “Info” button on the login window. If you ever find it necessary
to contact Infinity for technical support, have your version number ready.

infTools For more information on using the infTools application to launch

Scenario Builder, see the Infinity infTools Application Reference Guide.

Infinity Technical Support

The purchase of Trader and Scenario Builder includes a technical support
agreement. For specific information on the terms of your support
agreement, please see your Infinity license agreement.

If you wish to contact Infinity’s technical support staff, you can use either
the Infinity’s Client Services web site or telephone support. The Client
Services web site allows you to enter technical support requests, check
the status of your requests and download up to the minute information.
The URL for Infinity’s Client Services web site is:

http://www.infinity.com/client_services/

You will need to have a password to use this site. If you do not have a
password, contact your account manager or Infinity representative.

If you wish to reach the Help Desk via telephone, please contact your
local Infinity representative. In North America, contact our New York
office at (212) 745-9400. In the U.K. and Europe, contact our London
office at 44 171 702-3888. In Asia, Australia and New Zealand, contact
our Tokyo office at 81 3 3237-7769.

6 Introduction to Risk Analysis Trader Guide to Risk Analysis

 When your local office is closed, please call the main Help Desk at
Infinity’s Mountain View headquarters at (650) 940-6100 between 9:00
am and 5:00 pm Pacific Standard Time, Monday through Friday.

Queries, support requests and suggestions for product improvement may

be sent directly to Infinity:

fax: (650) 964-9844

e-mail: [email protected]

Please note that only registered users of Trader and Scenario Builder, as
designated in your Infinity license agreement, may request technical
support.

In order to assist in the support process, please be prepared to indicate the

version of Trader and Scenario Builder and the version of the Infinity
Data Model you are using. You can get this information by clicking on
the Info button in the Infinity Login window. You can also select the Info
command from the Help menu in Trader’s main window or in Scenario
Builder’s main window.

Infinity’s address is:

Infinity Financial Technology, Inc.

640 Clyde Court
Mountain View, CA 94043 USA

Confidential — Infinity 7.0 Infinity Technical Support 7

 Chapter 2

Risk Analysis Reports

Generating Reports
The reports present the results of your risk analyses in a tabular form.
Each type of analysis has its own report format. The vertical axis
generally lists dates or instruments being analyzed and the top row of the
report lists the type of value being calculated. Reports may be printed,
saved to the Infinity database or saved to a file for external use.

Before performing any analytical report, you must:

[1] Select a base counterparty in Trader’s main window. If the base

counterparty doesn’t match with the set of trades that you want to
analyze, the reports will be empty.
[2] Create a portfolio to define the set of trades you want to analyze.
[3] Create a valuation model that contains the pricing models and the
market data used to price the trades of the selected portfolio.

These actions are executed from Trader’s main window. Please refer to
the Infinity Trader Reference Guide for details.

Once you are done, pick any of the commands from the Analysis menu of
Trader’s main window to generate a report. The PDH and DPH reports
are also available in the trade worksheets.

Confidential — Infinity 7.0 Generating Reports 9

 The Analysis menu is opened from Trader’s main window.

Each analysis generates a new report window. Consequently, running

many analyses will create multiple open windows. If you have more than
one analysis window open and want to move quickly from report to
report, depress the middle mouse button (or both mouse buttons for NT
users), to display a drop-down list of the reports — both open and
iconized — which are currently in the workspace. Scroll down the list to
the desired report and release the middle mouse button to bring that report
to the front for viewing.

10 Risk Analysis Reports Trader Guide to Risk Analysis

 Report Windows
Because each report window looks essentially the same, this manual will
not show screen shots of each report. This is a typical report window:

The P&L - End of Day Report window

File menu

Scroll bars

The File menu in each report window contains the “Print” and “Save to
Database” commands, explained on the following pages. The report
heading at the top left indicates the report name, the transaction set
selected, the number of trades selected, the valuation date, the base
currency and the valuation model.

Each report has specific areas identified with a label. In this example
there are two areas: Cash Accounts and Trade Information. Each row in
each area represents a separate element of the area: cash account, trade
leg, period of time... For analyses where totals are calculated, summary
rows appear at the bottom of the group of elements being totalled with a
label “Total”. To display rows and columns which extend beyond the
report window, use the scroll bars along the bottom and right side of the
window.

Before producing some reports, Trader may ask you for additional
information; the windows used to enter these supplementary parameters
are covered in this manual, along with their corresponding reports.

Confidential — Infinity 7.0 Generating Reports 11

 File Commands in a Report Worksheet
Every report has the same commands in its File menu: Save to Database,
Print and Close.

Save to Database The Save to Database command allows you to save the report for future
processing using SQL statements or site-specific applications you have
developed. None of the applications supplied by Infinity make use of
saved reports (except for Profit & Loss—see page 60, Profit & Loss
Decomposition—see page 72 and Accrual Profit & Loss—see page 76).
Likewise, reports saved to the database cannot be retrieved in the Trader
application for viewing.

For each report, the following parameter information is saved: portfolio

name, valuation date, base counterparty, base currency, user code and
datetime. Curve identification numbers and datetimes are also saved for
the curves used to price the portfolio. All the data of the report are saved,
except for the total figures, which are derived from the saved data. For
information on the Infinity Data Model tables and columns which store
saved reports, consult the Infinity publications Data Model Reference
Guide and Data Model Developer’s Guide.

Print Use the Print command to print the reports to a printer, to a file (ASCII
text or PostScript) or to a lotus file. The Print Utility window is displayed
The Print Utility window

Click on the radio button corresponding to the output you want: Printer,
File or Lotus.

The Settings check box expands the Print Utility window to allow you to
modify your preferences. Printing without changing these settings will
invoke the default print settings.

The Print Utility window remains open after printing, allowing further
output operations. To close the Print Utility window, click on the Close
button. Any changes made to the settings will be retained and used as the
default values if the Print Utility window is opened again during the
current session of the application.

Print settings may be saved for use in future sessions by selecting the
Save Settings command button. The settings will be saved to the
“.infPrintConfig” file in the user’s home directory.

12 Risk Analysis Reports Trader Guide to Risk Analysis

 Print to Printer Click the Printer radio button and check the Settings box to expand the
window. Enter the unix print command used by your system into the
“Print Cmd” field. If necessary, make changes to the page orientation,
margins, font, lines per page and font size settings. Output type is
defaulted to PostScript for printer output. However, if you have a
command line utility that formats and prints ASCII text, you may type its
name in the Print Cmd field and choose Text as the output type.

The Printer version of the

Print Utility window

Portrait orientation means that a page is oriented like the pages of this
manual. Landscape orientation places the long side of the page
horizontally.

Note: Fixed-width fonts (like Courier) use the same amount of space for
each character, allowing numerical figures to line up for easier reading.
Variable-width fonts (like Times) allow less space to be used for skinnier
characters, such as “1” and “t”. This convention makes numerical figures
more difficult to compare, but it can help to fit more columns on a page.

In general, print the reports in landscape format using a five points font
and a page length setting of 50 Lines/Page.

Confidential — Infinity 7.0 Generating Reports 13

 Print to File Click the File radio button and choose a file name and a directory. Then
check the Settings box to expand the window. For Output Type, choose
“Text” (ASCII text file) or “PostScript” (an image that you can print later
from the command line). The remaining commands are the same as the
Printer options and apply to PostScript output only.

The File version of the

Print Utility window

Print to Lotus Click the Lotus radio button and choose a file name and a directory. Then
check the Settings box to expand the window. The file name suffix will
automatically change between “.wk1” and “.wk3” as you switch between
Lotus file formats.

The Lotus version of the

Print Utility window

14 Risk Analysis Reports Trader Guide to Risk Analysis

 Reports—General Tab
The General tab is the first screen that appears when you invoke a report.
This tab enables you to set general parameters to run the reports such as
the set of trades, the valuation date, the valuation model to use and the
base currency. The General tab looks essentially the same for all the
reports, unless specified.

Example of General tab in the MTM window

Setting the Click on the radio button corresponding to the type of trade selection you
transaction set want to use.

• Portfolio Name
The portfolio name is defaulted to the portfolio chosen in
Trader’s main window. Select a portfolio in the combo box
next to the Portfolio Name radio button. The report will
analyze the trades in the selected portfolio.
• Selected Trades
You can choose this option when you run the report from a
trade worksheet to perform the report on the corresponding
trade. In this version, you can only perform the PDH and
DPH reports from a trade worksheet.

On a future version, you will also be able to perform the reports on any set
of trades displayed in the Trader Blotter.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Setting the base Select a base currency in the Base Currency list. The base currency is
currency defaulted to the base currency chosen in Trader’s main window. The
currencies in your trades will be converted to the base currency for
display in the reports. If an FX rate is missing, the system will return an

Confidential — Infinity 7.0 Generating Reports 15

 error message. To input FX rates, use the Utilities: Market Data: FX Rates
command from Trader’s main window.

Setting the report Select a report type in the Report Type list. The available report types are
type different for all the reports.

Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the pricing models and the market
data used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results. The following pages
document the results of each report.

Displaying the Once you have run the report, the Report window is displayed. If you
report close the Report window, then you can open it again by clicking the
Display Report button.

You can hit the Display button to display a different report type of the
same report. You do not have to regenerate the report.

You can also hit the Display button to display the report in a different
format. Once again, you do not have to regenerate the report.

Setting the The specific parameters used to perform the reports are set in the
specific Template tab of each report window. You can load an existing template in
parameters the Template list or create a new template. The following pages document
the specific parameters of each report.

Creating a new Click on the Template tab and input the required information. Type the
template template name in the Template field at the top of the window and hit
<Enter>. The following dialog box is displayed.

Click on the Yes button. The following dialog box is displayed.

Click on the OK button. Then click on the Save Template button.

16 Risk Analysis Reports Trader Guide to Risk Analysis

 Mark to Market
The Mark to Market report calculates the current value of the trades by
trade or by position.

To perform the Mark to Market report, select the Analysis: MTM

command from Trader’s main window. The MTM window is displayed.

MTM window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab is not available in this
report.

Setting the report Select a report type in the Report Type list.
type
• MTM by Trade
The results are displayed for each trade leg.
• MTM by Position
For multiply-traded securities (such as bonds), the results are
netted by security and for other securities, the results are
displayed by trade leg.
Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the MTM by Trade report

Columns in Mark to Market by Trade report

Column Name Contents

Transaction Number Transaction, trade and trade leg number

Maturity Date Trade expiration date

Payer Trade leg payer counterparty

Confidential — Infinity 7.0 Mark to Market 17

 Columns in Mark to Market by Trade report

Column Name Contents

Receiver Trade leg receiver counterparty

Security Type Trade leg security type: Future option,

Swaption, Cap...

CCY Security currency

Description Trade leg security description

Payment Frequency Trade leg interest payment frequency

Strike Trade strike price or strike rate (when

relevant)

Trade Amount Trade leg amount

Local CCY Trade leg currency

NPV (Local CCY) NPV of the trade leg expressed in trade

currency

Cash (Local CCY) Cash payments on the valuation date,

expressed in trade currency

Accrual (Local CCY) Accrued interest on the valuation date,

expressed in trade currency

Accrual Straight-Line (Local Accrued interest (using the straight line

CCY) method), expressed in trade currency

FX Rate Spot FX rate on the valuation date used to

convert the trade currency to the base
currency

NPV (Base CCY) NPV of the trade leg expressed in base

currency

Cash (Base CCY) Cash payments on the valuation date,

expressed in base currency

Accrual (Base CCY) Accrued interest on the valuation date,

expressed in base currency

Accrual Straight-Line (Base Accrued interest (using the straight line

CCY) method), expressed in base currency

Start Date Trade effective date.

Fixed Rate Fixed rate for a fixed leg (0 for a floating

leg)

The bottom row of the Mark to Market Report window displays the total
NPV from the perspective of the base counterparty, expressed in the base
currency.

18 Risk Analysis Reports Trader Guide to Risk Analysis

 Fields in the MTM by Position report

For multiply-traded securities, each row in the table represents the base
counterparty’s position in each security by settlement date. Trades
sharing the same security identification number, with settle dates
occurring before the valuation date, are netted in a single row.
Columns in Mark to Market by Position Report

Column Name Contents

Security Type Trade leg security type: Future option,

Swaption, Cap...

Security Id Trade leg security id. For multiply-traded

securities, the security id may correspond
to several trades and for other securities,
the security id corresponds only to one
trade.

The other fields are the same as for the MTM by Trade report. The Start
Date field and the Fixed Rate field are not available in this report.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Mark to Market 19

 Sensitivity Reports
The sensitivity analyses in Trader allow you to determine the sensitivity
of the trades with respect to changes in the assigned curves and volatility
surfaces. The following sensitivity reports are available:

• The parallel shift analysis calculates the sensitivity of the

trades to parallel shifts in the interest rate curves, volatility
curves or volatility surfaces.
• The custom shift sensitivity analysis calculates the sensitivity of
the trades against any curve or any scenario.
• The volatility points sensitivity analysis calculates the
sensitivity of option prices to changes in the defined
volatilities on the volatility surface.
• The cross sensitivity analysis calculates the sensitivity of the
trades to parallel shifts in a choice of two market data
(interest rate curves, volatility curves, volatility surfaces).

First, a base net present value of the trades is calculated. Then, each point
on the specified curve is shifted, one at a time. Using the modified curve,
the net present value of the trades is recalculated and then the dNPV (the
sensitivity with respect to each discrete shift of the curve) is determined.

Parallel Shift
The Parallel Shift report determines the effect of a parallel shift in curves
or volatility surfaces upon the NPV of the trades.

To perform the Parallel Shift report, select the Analysis: Parallel Shift
command from Trader’s main window. The Sensitivity Parallel Shift
window is displayed.

Sensitivity Parallel
Shift window
General tab

20 Risk Analysis Reports Trader Guide to Risk Analysis

 The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to set the
parallel shift to perform the report. You can save the parallel shift
parameters as a template.

Setting the report Select a report type in the Report Type list.
type
• Specific Curve
The results are displayed by curve. For example, the user will
have a group of sensitivities for MY_LIBOR_CURVE and
that will be followed by a group of sensitivities for
MY_PRIME_CURVE.
• Curve Index
The results are displayed by curve index. For example, the
user will have a group of sensitivities for 3MONTH LIBOR,
regardless of the different curves for this index.
Setting the Select an existing template from the Template list or click on the
parallel shift Template tab to set a parallel shift. The Template tab is displayed.

Sensitivity Parallel
Shift window
Template tab

[1] Select the market data you want to shift in the “Market Data Type”
list: interest rate, volatility or FX volatility.
[2] Type the shift value in basis points in the Shift Amount field.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Confidential — Infinity 7.0 Sensitivity Reports 21

 Fields in the Parallel Shift Specific Curve report

The Parallel Shift Specific Curve report contains two areas: a Summary
area that displays the total sensitivity by curve and a Details area that
displays the sensitivity by curve and by trade leg. For each curve, a label
indicates the curve name and the curve type.
Columns in the Parallel Shift Specific Curve report

Column name Contents

Transaction Number Transaction, trade and trade leg number

Maturity Date Trade expiration date

Payer Trade leg payer counterparty

Receiver Trade leg receiver counterparty

Type Trade leg security type: Future option,

Swaption, Cap...

CCY Security currency

Description Trade leg security description

Strike Trade strike price or strike rate (when

relevant)

Fixed Rate Fixed rate for a fixed leg (0 for a floating leg)

Traded Trade leg amount

Local CCY Trade leg currency

Base Value Local CCY NPV of the trade leg without any shift,
expressed in trade currency

Shifted Value Local CCY NPV of the trade leg after applying the shift,
expressed in trade currency

Change Local CCY Shifted value minus base value expressed in

trade currency - For a 1 bp shift, this column
represents the PV01

FX Spot FX rate on the valuation date used to

convert the trade currency to the base
currency

Base Value Base CCY NPV of the trade leg without any shift,
expressed in base currency

Shifted Value Base CCY NPV of the trade leg after applying the shift,
expressed in base currency

Change Base CCY Shifted value minus base value expressed in

base currency - For a 1 bp shift, this column
represents the PV01

22 Risk Analysis Reports Trader Guide to Risk Analysis

 Fields in the Parallel Shift Curve Index report

The Parallel Shift Curve Index report contains two areas: a Summary area
that displays the total sensitivity by curve index and a Details area that
display the sensitivity by curve index and by trade leg. A label identifies
each curve index.

The fields are the same as for the Parallel Shift Specific Curve report.

Displaying the Please refer to page 16 for information on the Display button.
report

Custom Sensitivity
The Custom Sensitivity report is used to measure the sensitivity of the
trades against any curve or any scenario.

To perform the Custom Sensitivity report, select the Analysis: Custom

Sensitivity command from Trader’s main window. The Sensitivity
Custom window is displayed.

Sensitivity Custom window

General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to set custom
curves or scenarios to perform the report. You can save the specific
parameters as a template.

This report allows for flexibility in sensitivity analysis. For example, you
might use this report to calculate the sensitivity of a portfolio to a shift in
either the bid or offer side of the curve. You would originally assign the
curve using a valuation model in the General tab. Then, using the
Template tab, you would assign a different curve representing the shifted
bid or offer values. The analysis would then calculate the sensitivity to
this shift.

Confidential — Infinity 7.0 Sensitivity Reports 23

 Setting the report Select a report type in the Report Type list. The only choice available is
type Custom Sensitivity.

Setting the Select an existing template from the Template list or click on the
specific Template tab to set the specific parameters. The Template tab is
parameters displayed.

Sensitivity Custom window

Template tab

Click on the Custom Type radio button corresponding to the custom

definition you want to use:

• Curve Difference
Select a custom valuation model in the Custom Valuation
Model list. The system will calculate the sensitivity of the
trades between the general valuation model and the custom
valuation model.
• Curve Spread
The Curve Spread Definition area is displayed.

Sensitivity Custom window

Template tab
Curve Spread
Definition area

>> Check the Base Curve box to set the base curve. Select a
currency and a curve.
OR
Clear the Base Curve box to use the curve from the
general valuation model as base curve.
>> Select a spread curve in the Spread Curve area.
Select a currency, a curve, a curve instance and a time
stamp.

The system will calculate the sensitivity of the trades

between the general valuation model and the base curve
perturbed by the spread curve.

24 Risk Analysis Reports Trader Guide to Risk Analysis

 Optional: Click on the Save Template button to update the changes. To
create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Custom Sensitivity report

In addition to the regular heading, the Custom Sensitivity report shows

the curves used for the shift (base curve and spread curve or valuation
model).

The Custom Sensitivity report contains a Details area that displays the
sensitivity by trade leg. The fields in this report are the same as for the
Parallel Shift Specific Curve report, see page 21.

Displaying the Please refer to page 16 for information on the Display button.
report

Sensitivity Volatility Points

The Sensitivity Volatility Points report calculates the sensitivity of option
prices to user-defined changes in defined volatilities on volatility curves
and volatility surfaces. The format of the report is different depending on
whether volatility curves, simple volatility surfaces or tenor spread
volatility surfaces are used.

Volatility Curves For volatility curves, the report displays the date of the curve point and
the resulting change in NPV when the point is bumped up by a user-
defined percentage point of volatility.

Simple Volatility A simple volatility surface has three axes: time to expiration (T), strike
Surfaces (K) and tenor of the underlying (U). Thus, the number of points in the
surface is T × K × U. A sensitivity matrix of two axes (T x K for example)
is displayed for each value along the third axis (U for this example). We
represent a three-dimensional surface as a series of two-dimensional
slices. Each value in the matrix represents the change in NPV when the
point is bumped up by a user-defined percentage point of volatility.

Tenor Spread Tenor spread volatility surfaces have two axes: time to expiration (T) and
Volatility Surfaces strike (K), along with a vector of tenor/spread pairs. A single sensitivity
matrix (T × K) is displayed for the surface, along with a vector
representing the sensitivity to shifts in the spread vector. Each value in the
matrix represents the change in NPV when the point is bumped up by a
user-defined percentage point of volatility.

Optimization Volatility surfaces can consist of hundreds or even thousands of points.

Strategy Since shifting each point and revaluing the trades would make the report
unacceptably slow, we instead keep track of the points on the surface to

Confidential — Infinity 7.0 Sensitivity Reports 25

 which the given trades are sensitive. This is done during the first
revaluation without incurring an appreciable runtime cost. We then only
shift this (usually small) subset of surface data points.

To perform the Sensitivity Volatility Points report, select the Analysis:

SensVolPoints command from Trader’s main window. The Sensitivity
Volatility Points window is displayed.

Sensitivity Volatility
Points window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to set the
shifts to perform the report. You can save the shifts as a template.

Setting the report Select a report type in the Report Type list. The only choice available is
type Volatility Points.

Setting the shifts Select an existing template from the Template list or click on the
Template tab to set the shifts. The Template tab is displayed.

Sensitivity Volatility
Points window
Template tab

[1] For volatility surfaces, select the fixed axis in the Fixed Axis field:
Expiry, Strike or Tenor.
[2] Type the shift percentage in the “Shift Amount” field.

26 Risk Analysis Reports Trader Guide to Risk Analysis

 [3] Click on the radio button corresponding to the volatility surfaces
you want to shift:
• All
You want to shift all the volatility surfaces of the valuation
model.
• Selected
You want to shift only selected volatility surfaces. The
volatility surfaces of the valuation model are displayed
near the Selected button. Click on the Volatility Surfaces
you want to shift to select them.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

The Sensitivity Volatility Points report shows the shifted values and the
resulting changes in NPV of the set of trades.

The format of the report depends on the type of the volatility data used, as
explained on page 25.

Displaying the Please refer to page 16 for information on the Display button.
report

Cross Sensitivity
The Cross Sensitivity report calculates the sensitivity of the trades to
parallel shifts in two market data types such as curves and volatility
surfaces. This report is in the form of a matrix, with one axis for each type
of shifted market data. The number of steps and increments for the shifts
are user-defined.

In a typical market situation/period/cycle, a sizable increase or decrease

in interest rates would be associated with a particular directional move in
volatility. This allows the user to have a specific view on how the
positions should be constructed.

For example, if interest rates increase and it is expected that this will
cause a decrease in volatility, then the user wants to ensure that the
positions are getting shorter volatility. This report is intended to provide
this information.

To perform the Cross Sensitivity report, select the Analysis: Cross

Sensitivity command from Trader’s main window. The Sensitivity Cross
window is displayed.

Confidential — Infinity 7.0 Sensitivity Reports 27

 Sensitivity Cross window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to set the
shifts to perform the report. You can save the shifts as a template.

Setting the report Select a report type in the Report Type list. The only choice available is
type Cross Sensitivity.

Setting the shifts Select an existing template from the Template list or click on the
Template tab to set shifts for the axes. The Template tab is displayed.

Sensitivity Cross window

Template tab

[1] Select the market data you want to shift on the X-axis in the X-Axis
list: interest rate, volatility or FX volatility.
[2] Select the market data you want to shift on the Y-axis in the Y-Axis
list: interest rate, volatility or FX volatility.
[3] Click on the X - Axis radio button to set the shift for the X-axis
market data you selected.
Type a start value, an end value and an increment value. Then click
on the Fill button to calculate the shift values.
You can add specific values by typing a specific value in the
Specific Value field and clicking on the Add button.

28 Risk Analysis Reports Trader Guide to Risk Analysis

 [4] Click on the Y - Axis radio button to set the shift for the Y-axis
market data you selected.
Type a start value, an end value and an increment value. Then click
on the Fill button to calculate the shift values.
You can add specific values by typing a specific value in the
Specific Value field and clicking on the Add button.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Cross Sensitivity report

The Cross Sensitivity report is a matrix with one axis for each shifted
data. Each axis shows the shifted values and each cell of the matrix shows
the change in NPV of the set of trades for the given shifts in market data.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Sensitivity Reports 29

 Cash Flow Projection
The Cash Flow Projection report provides incoming and outgoing cash
flows for a user-defined period in order to enable the user to manage cash
balances efficiently. The report projects cash flow amounts in user-
defined time buckets.

To perform the Cash Flow Projection report, select the Analysis: Cash
Flow Projection command from Trader’s main window. The Cash Flow
Projection window is displayed.

Cash Flow
Projection window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to define the
period of analysis and the time buckets. You can save the specific
parameters as a template.

Time buckets The time bucket parameters allow you to divide each period of analysis
into discrete time units (buckets). Time buckets are defined by entering
values into the days, weeks, months and quarters fields in the Template
tab. The period of analysis is then divided into daily, weekly, monthly and
quarterly units.

Example: Assume that you will be generating a Cash Flow Projection

report with the begin date June 15, 1996 and the end date December 31,
1997. You have entered the following values in the time bucket fields: 10
days, 4 weeks, 3 months, 1 quarter. The Cash Flow Projection report will
create the following time buckets, starting on June 15th, 1996:

• 10 daily buckets from 6/15/96 to 6/24/96

• 4 weekly buckets from 6/25/96 to 7/22/96
• 3 monthly buckets from 7/23/96 to 10/22/96
• 1 quarterly bucket from 10/23/96 to 1/22/97

30 Risk Analysis Reports Trader Guide to Risk Analysis

 The remaining time from January 22, 1997 to December 31, 1997 (end
date) will be divided into as many semiannual buckets as possible: one
from 1/23/97 to 7/22/97 and a stub period of 7/23/97 to 12/31/97.

Setting the report Select a report type in the Report Type list:
type
• Summary
This report calculates the net cash flows for each user-defined
time bucket and displays them expressed in base currency
only.
• Detailed
This report calculates the cash flows for each user-defined
time bucket and displays them by trade leg.
Setting the Select an existing template from the Template list or click on the
specific Template tab to set specific parameters. The Template tab is displayed.
parameters

Cash Flow
Projection window
Template tab

[1] Set the Analysis Period.

The Start Date is defaulted to the valuation date. You can modify it.
Use the field next to the start date to set a relative end date, or use
the End Date field to set a calendar end date. A relative end date is
set to a specified number of months from the start date.
[2] Set the Time Buckets.
Projections for all fixed and floating cash flows are grouped into
the time intervals that have been set in the Time Buckets area of
this tab. Within each time bucket, cash flows are divided into
groups of fixed flows and floating flows. Within the group of
floating flows, flows are grouped by interest rate index.
[3] Check the Display boxes corresponding to the type of cash flow
you want to display:
• Estimated Flows
Flows to be reset.
• Certain Flows
Fixed flows and reset flows.

Confidential — Infinity 7.0 Cash Flow Projection 31

 Optional: Click on the Save Template button to update the changes. To
create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Cash Flow Projection Detail report

Columns in the Cash Flow Projection Detail report

column name contents

Begin Date Start date of a time bucket

End Date End date of a time bucket

Payment Date Cash flow payment date

Transaction Transaction, trade and trade leg number

Number

Maturity Date Trade maturity date

Payer Trade leg payer counterparty

Receiver Trade leg receiver counterparty

Security Type Trade leg security type: Future option, Swaption, Cap...

CCY Security currency

Description Trade leg security description

Payment Trade leg interest payment frequency

Frequency

Strike Trade strike price or strike rate (when relevant)

Fixed Rate Fixed rate for a fixed leg or 0 on a floating leg

Trade Amount Trade leg amount

Local CCY Trade leg currency

Estimated Flows Estimated cash flows (present value) of a floating leg,

Local CCY expressed in trade currency (0 on a fixed leg, 0 on a
reset floating leg)

Certain Flows Fixed cash flows (present value) of a fixed leg and reset
Local CCY flows (both fixed and floating legs), expressed in trade
currency

Total Flows Local Estimated flows plus certain flows, expressed in trade
CCY currency

FX Rate The spot FX rate on the valuation date used to convert

the trade currency to the base currency

Estimated Flows Estimated cash flows (present value) of a floating leg,

Base CCY expressed in base currency (0 on a fixed leg, 0 on a
reset floating leg)

32 Risk Analysis Reports Trader Guide to Risk Analysis

 Columns in the Cash Flow Projection Detail report

column name contents

Certain Flows Base Fixed cash flows (present value) of a fixed leg and reset
CCY flows (both fixed and floating legs), expressed in base
currency

Total Flows Base Estimated flows plus certain flows, expressed in base
CCY currency

Fields in the Cash Flow Projection Summary report

Columns in the Cash Flow Projection Summary report

column name contents

Begin Date Start date of a time bucket

End Date End date of a time bucket

Base CCY Net estimated cash flows (present value) of floating legs
Estimated Flows for this period, expressed in base currency

Base CCY Certain Net fixed cash flows (present value) of fixed legs and
Flows net reset flows (both fixed and floating legs) for this
period, expressed in base currency

Base CCY Total Estimated flows plus certain flows, expressed in base
Flows currency

For further details on the estimated cash flows calculation, see “Projected
Flows” on page 103.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Cash Flow Projection 33

 Direct Perturbation Hedge
This chapter discusses the implementation of the Direct Perturbation
Hedge in Trader and Scenario Builder.

For a detailed discussion of the financial and computational aspects of

this hedging technique, please refer to the Infinity white paper Direct
Perturbation Hedging Analytics Financial Specification.

DPH Overview The Direct Perturbation Hedge provides an alternative to the Partial
Differential Hedge for calculating hedge recommendations. The DPH
enables you also to compute the sensitivities (delta and gamma) of all
instruments by security type, as part of the former Ladders reports.

Methodology The Direct Perturbation Hedge was designed to meet the need for a curve/
Overview surface hedging mechanism which is independent of the underlying
instruments and the generation algorithm used in constructing these
market data representations. The Direct Perturbation Hedge method can
calculate hedge recommendations for any set of hedge vehicles which can
be valued with the market data of the trades being hedged. Thus, the set of
hedge vehicles is not restricted to the set of zero yield curve generating
instruments as it is with the Partial Differential Hedge mechanism. Since
the perturbations are independent of the underlying curve instruments, it
is possible to calculate hedges from curves and surfaces which are
generated externally and entered into the system as simple curves or
surfaces.

The methodology supports the calculation of hedge recommendations

from a wide array of curve perturbations, including those used in the
Partial Differential Hedge. For example, all perturbations used currently
to generate Sensitivity reports could be used to generate hedge
recommendations. New perturbation types which are supported by this
methodology include principal components which perturb the whole
curve at once and bucketed perturbations which perturb small segments of
the curve while leaving the remainder of the curve unchanged.

The calculation of hedge recommendations with respect to simultaneous

perturbations of many different types of market data fits within the Direct
Perturbation Hedge framework. For example, a set of trades with both
interest rate and volatility dependence should be hedged against changes
in both rates and volatility. Hedge recommendations can be calculated in
one step instead of calculating an interest rate hedge and then calculating
a residual vega hedge. Shifts in volatility and vega hedge are not
supported in version 7.0.

The methodology provides the control mechanism and flexibility to allow

the user to make trade-offs between hedging performance and accuracy.
Trade-offs can be made between the number and precision of

34 Risk Analysis Reports Trader Guide to Risk Analysis

 perturbations and the speed at which hedge recommendations are
calculated.

Calculation The Direct Perturbation Hedge requires the following elements:

Overview
• A set of trades to be hedged.
• A set of market data with which the trades can be priced. This
is done by assigning a valuation model.
• A set of hedge vehicles which can be priced with the same set
of market data used to price the trades.
• A perturbation methodology with a set of perturbations.

The first step in calculating the hedge recommendation is the calculation

of a generalized delta vector for the set of trades and each of the hedge
vehicles. Each row in a generalized delta vector represents the change in
the value of the trades or hedge vehicle due to one perturbation of one
piece of market data. It is the difference between the value calculated with
the unperturbed market data and the value calculated with the
perturbation applied to the set of market data, reported in the selected
base currency. The length of each delta vector equals the total number of
perturbations of all the market data.

The second step in deriving hedge recommendations is to choose

positions in the set of hedge vehicles whose generalized delta vectors
optimally offset the generalized delta vector of the trades. Unlike the
Partial Differential Hedge, the Direct Perturbation Hedge does not require
a one-to-one correspondence between the user-chosen hedge vehicles and
user-defined market data perturbations, but requires that there are at least
as many perturbations as hedge vehicles. When the correspondence is not
a one to one, the calculated hedge is not an exact delta hedge, but is an
“optimal” delta hedge. This means that the residual un-hedged exposure
is minimized with respect to an explicit objective function.

The hedge recommendation algorithm is essentially one of applying

linear algebra to the generalized delta vectors and is very similar to
multilinear regression techniques. When the number of perturbations
coincides with the number of hedge vehicles and the hedge vehicles’ delta
vectors are linearly independent, the hedge recommendation procedure
significantly simplifies. In this case, the computation of the hedge
recommendations becomes one of expressing the delta vector of the
trades as a linear combination of the delta vectors of the hedge vehicles.

Hedge Vehicles The DPH report allows the user to choose hedge vehicles from the whole
set of traded instruments from which curves can be generated — bond
futures, caps, cash, money market futures, FRAs, actual bonds and par
swaps. The underlying library supports the use of any instrument that the
system can mark to market as a hedge vehicle. The hedge vehicles you
choose should be able to be priced with the same market data used to
value the trades.

Confidential — Infinity 7.0 Direct Perturbation Hedge 35

 Forward bucket The DPH report supports bucketed forward rate perturbations of zero
perturbation yield curves, similar to the perturbations used in the Sensitivity reports.
The perturbations are additive spreads in zero coupon space constructed
to reflect the action of bucketed perturbations in forward money market
rate space. The user can choose the length of each bucket and the
amplitude of the forward rate perturbation.

Principal The DPH also report supports the principal component perturbation,
component which affects the curve along its whole length. The user can choose the
perturbation number of perturbation components that are applied to the curve: the first
component is a parallel shift, the second one (so called twist) changes the
slope of the shifted curve, the third one (so called hump) changes the
curvature of the twisted curve, and so on: each component applies to the
curve perturbed by the previous component. The user can also choose a
weighting factor for each component.

These perturbation methodologies are discussed in detail in the Infinity

white paper Direct Perturbation Hedging Analytics Financial
Specification.

Performing the DPH Report

To perform the DPH report, select the Analysis: DPH command from
Trader’s main window. The DPH window is displayed. You can also
select the Analysis: Direct Perturb Hedge command from any trade
worksheet.

DPH window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to define the
hedge parameters. You can save the hedge parameters as a template.

Setting the report Select a report type in the Report Type list.
type
• Recommendation

36 Risk Analysis Reports Trader Guide to Risk Analysis

 This report displays the portfolio hedge recommendation.
• Supplement
This reports displays the hedge recommendation, a set of
sensitivities (delta and gamma) for the portfolio and a set of
sensitivities (delta and gamma) for each hedge vehicle.
• Sensitivities
This report displays a set of sensitivities (delta and gamma)
of the portfolio, aggregated by security type.
Setting the hedge Select an existing template from the Template list or click on the
parameters Template tab to define the hedge parameters. The Template tab is
displayed.

DPH window
Template tab

[1] Select a set of hedge vehicles in the Hedge Vehicles area or click on
the Define button to define a set of hedge vehicles (called the hedge
portfolio). The Hedge Portfolio window is displayed. See the sec-
tion on this window on page 39.
[2] In the Perturbation area, click on the Methodology radio button
corresponding to the perturbation methodology you want to use:
• Principal Component
Select a perturbation group for this methodology or click
on the Define button. The Principal Component Perturba-
tion window is displayed. See the section on this window
on page 40.
• Forward Bucket Equivalent
Select a perturbation group for this methodology or click
on the Define button. The Perturbation Set window is dis-
played. See the section on this window on page 41.

A quick overview of the perturbation methodologies is available on

page 36 and you can refer to the Infinity white paper Direct Perturbation
Hedging Analytics Financial Specification for further information.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Confidential — Infinity 7.0 Direct Perturbation Hedge 37

 Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the DPH Recommendation report

This report displays the recommendation for each hedge instrument.

Columns in the Direct Perturbation Hedge Recommendation report

Column Name Contents

CCY Currency of the hedge instrument

Hedge Instrument Hedge instrument security type

Description Hedge instrument description

Recommendation Recommended hedge to offset the sensitivity -

A positive amount recommends to take a long
position and a negative amount recommends
to take a short position - See the Infinity white
paper Direct Perturbation Hedging Analytics
for the calculation of the recommendation

Residuals Difference between the value of the actual

portfolio and a portfolio containing all
recommended hedge vehicles - For a perfect
hedge, residuals should be equal to 0

Fields in the DPH Supplement report

This report contains one area for the hedge recommendation and one area
for each sensitivity measure.
Columns in the Direct Perturbation Hedge Supplement report—Recommendation area

Column Name Contents

CCY Currency of the hedge instrument

Hedge Instrument Hedge instrument security type

Description Hedge instrument description

Recommendation Recommended hedge to offset the sensitivity -

A positive amount recommends to take a long
position and a negative amount recommends
to take a short position - See the Infinity white
paper Direct Perturbation Hedging Analytics
for the calculation of the recommendation

Residuals Difference between the value of the actual

portfolio and a portfolio containing all
recommended hedge vehicles - For a perfect
hedge, residuals should be equal to 0

For each sensitivity measure, there is a row by perturbation component or

by time bucket depending on your perturbation methodology, and there is
a column for the portfolio and a column for each hedge instrument.

38 Risk Analysis Reports Trader Guide to Risk Analysis

 Fields in the DPH Sensitivities report

This report contains one area for each sensitivity measure. There is a row
by perturbation component or by time bucket depending on your
perturbation methodology, and there is a column for each security type of
the portfolio.

Displaying the Please refer to page 16 for information on the Display button.
report

Hedge Portfolio window

The Hedge Portfolio window enables you to define a set of hedge
vehicles, called “the hedge portfolio” for the DPH report.

Hedge Portfolio window

Loading an Select a name in the Name list and click on the Load button. You can
existing hedge modify the content of the portfolio by adding or removing securities in the
portfolio Assigned Securities list. Click on the Save button to update the changes.

Creating a hedge Type a name in the Name list. Add securities to the portfolio and click on
portfolio the Save button to create the portfolio.

Adding a security Select a currency, a security type and a security sub type in the
to the hedge corresponding lists. The available securities for this selection are
portfolio displayed in the Available Securities list.

Select a security from the Available Securities list and click on the Add
button to add the security to the hedge portfolio. The security is displayed
in the Assigned Securities list. You can add several securities.

The following actions are available on the securities:

• Create a new security

You can create a new security for the selected currency/
security type/security sub type by clicking on the New

Confidential — Infinity 7.0 Direct Perturbation Hedge 39

 Security button. The corresponding security worksheet is
displayed and you can input the security parameters. Please
refer to the Infinity Trader Reference Guide for information
on the security worksheets.
• Modify a security
Select a security from the Available Securities list and click
on the Modify Security button. The corresponding security
worksheet is displayed. Please refer to the Infinity Trader
Reference Guide for information on the security worksheets.
• Delete a security
Select a security from the Available Securities list and click
on the Delete Security button. If you have the right to do so,
the security is deleted.

Principal Component Perturbation window

The Principal Component Perturbation window enables you to define a
perturbation group for the principal component perturbation methodology
in the DPH report. This methodology is described on page 36. If you use
the forward bucket perturbation, please refer to Perturbation Set window
on page page 41.

Principal Component
Perturbation window

Loading an Select a name in the Name list and click on the Load button. You can
existing display the content of the perturbation group. You will be able to modify
perturbation group an existing group in a further version.

Creating a Type a name in the Name list. Define all input parameters and click on the
perturbation group Save button to create the perturbation group.

Defining interest The Interest Rate area enables you to specify the perturbation
rate shifts components.

40 Risk Analysis Reports Trader Guide to Risk Analysis

 [1] Type a spread amount in basis point in the Spread Amount field to
perform a parallel shift.
[2] Type a characteristic time (as an integer unit) in the characteristic
Time field to define the shapes of the perturbations for the
perturbation components 2 and above. Please refer to the Infinity
white paper Direct Perturbation Hedging Analytics Financial
Specification for further details.
[3] Choose a number of components in the Number of Components
field.
• 1 means that only the parallel shift will be applied
• 2 means that the parallel shift and the twist will be applied
• 3 means that the parallel shift, the twist and the hump will
be applied, and so on
[4] Check the “Apply Exponential Decay Factor” box to apply
exponential weighting factors to the components. Type the decay
factor in the Decay Factor field.
OR
Clear the “Apply Exponential Decay Factor” box if you don’t want
to apply weighting factors to the components.
[5] The perturbation components are displayed in the Component/
Weighting table. You can modify the weighting factor of each
component.

Perturbation Set window

The Perturbation Set window enables you to define a perturbation group
for the forward bucket perturbation methodology in the DPH report. This
methodology is described on page 36. If you use the principal component
perturbation, please refer to the Principal Component window on page
page 40.

Choosing The number and size of perturbation buckets must be consistent with the
reasonable chosen set of hedge vehicles. For example, if you are hedging with 3
perturbation month futures contracts, the buckets should be set quarterly (or more
buckets frequently). A semi-annual bond hedge vehicle would require at lest
semi-annual buckets. If this requirement is not met, the report will fail
with the following message “calculation matrix is not singular”.

For the calculation to be valid the hedge vehicles must be linearly

independent with respect to the perturbation set. The hedge vehicles are
linearly independent if their generalized delta vector with respect to the
perturbation set are linearly independent, which will not be the case in the
following circumstances:

• There are more hedge vehicles than there are perturbations.

• The delta vectors for some hedge vehicles are zero because
the perturbations in the set are too coarse grained to affect

Confidential — Infinity 7.0 Direct Perturbation Hedge 41

 every hedge vehicle.
• Some of the hedge vehicles relative to the perturbations are
redundant.
• If the hedge recommendations cannot be calculated, the user
can try the following steps:
>> Eliminate redundant hedge vehicles after examining
generalized delta vectors and determining which vehicles
are dependent.
>> Increase the number of perturbations. This is
accomplished by making the Bucket Interval smaller or by
increasing the Bucket End Term.
• Zero delta vectors can occur with bucketed perturbations if
the buckets are so wide that none of the perturbations change
the value of the hedge vehicle. An example of this
phenomenon is perturbations with annual buckets applied to a
hedge portfolio of 3M EuroDollar futures. The perturbations
will not change the value of many of the futures.

The reader should note that localized perturbations, such as the bucketed
forward rate perturbations currently implemented, will not map exposure
in one segment of the market into exposure in another segment. If you
compare the results of a Partial Differential Hedge and a Direct
Perturbation Hedge where the set of hedge vehicles is a subset of the
curve generating instruments, you will note that both hedging techniques
will produce very similar hedge recommendations for the smaller set of
hedge vehicles. If the Partial Differential Hedge recommends substantial
positions in the curve generating instruments which were not chosen for
the set of hedge vehicles, the Direct Perturbation Hedge has a large
unhedged residual.

Assume, for example, that we wish to value a portfolio with a curve

generated from cash rates, 3 years of futures and a 5 year swap. Assume
further that the Direct Perturbation hedge vehicles are chosen to be only
the 3 years of futures. The hedge recommendations for the futures will be
very close for both hedging techniques. However, the Partial Differential
Hedge may show a large exposure to the five year swap rate while the
Direct Perturbation Hedge will show none.

The user should note that this effect is caused by the localized
perturbation set and is not a property of the Direct Perturbation Hedge in
general. Global perturbations such as the principle component
perturbation methodology does not have this property.

42 Risk Analysis Reports Trader Guide to Risk Analysis

 Perturbation Set window

Loading an Select a name in the Name list and click on the Load button. You can
existing modify the content of the perturbation group by defining a perturbation
perturbation group schedule. Click on the Save button to update the changes.

Creating a Type a name in the Name list. Define a perturbation schedule and click on
perturbation group the Save button to create the perturbation group.

Defining a The perturbations represent bucket forward rate perturbations.

perturbation
schedule [1] Select a currency.
[2] Type the number of buckets per year in the Bucket Interval field.
[3] Type the number of years in the Bucket End Term field.
[4] Type the amplitude of the forward rate perturbation in the
Perturbation Amount.
[5] Click on the Generate button to generate a set of perturbations from
these three fields. The generated Perturbation Schedule is
completely editable. Rows can be added to or deleted from the
schedule and the value in each column can be edited. For example it
is possible to make the bucket start and end dates correspond to
IMM dates.

Once you are satisfied with the Perturbation schedule for that currency,
click on the Add button to add the schedule to the Assigned Set.

To see the perturbations for the Assigned Set in any currency, highlight
the currency and press the Edit button.

Confidential — Infinity 7.0 Direct Perturbation Hedge 43

 Partial Differential Hedge
The PDH report calculates the sensitivity of your trades to changes in the
yields of the underlying instruments of the pricing interest curves. The
PDH report provides hedge recommendations to offset this sensitivity.

Overview
The hedge analysis first measures the sensitivity (change in the NPV) of
the trades to a shift in the yield of an underlying hedge instrument. Then it
measures the change in the value of the hedge instrument as a result of the
same shift. This is accomplished by moving the yield of each underlying
instrument, one instrument at a time, by a user-defined specified number
of basis points. After each basis point shift, the yield curve is regenerated
and the trades and the underlying instruments are repriced. Based on the
ratio of the two sensitivity analyses, the hedge analysis recommends a net
long or short position in that underlying instrument.

Performing the PDH Report

To perform the PDH report, select the Analysis: PDH command from
Trader’s main window. The PDH window is displayed. You can also
select the Analysis: Partial Diff Hedge command from any trade
worksheet.

PDH window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to set the
shifts. You can save the shifts as a template.

44 Risk Analysis Reports Trader Guide to Risk Analysis

 Setting the report Select a report type in the Report Type list. The only choice available is
type Partial Differential Hedge.

Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Hedge analysis requires that the discounting and forecasting curves

assigned to the trades be derived curves (constructed from underlying
instruments). Please refer to the Infinity Market Environment Manager
Guide to create derived curves.

In addition, the curves assigned to your trades must be valid on the

valuation date. If these curve assignment conditions are not met, Trader
will display a warning box and quit the analysis. To update a curve for use
in the PDH report, return to the Market Environment Manager application
and regenerate the curve on the valuation date.

Setting the shifts Select an existing template from the Template list or click on the
Template tab to set the shifts. The Template tab is displayed.
PDH window
Template tab

The Gamma shifts are not supported any longer in this version.

[1] Click on the Delta radio button corresponding to the delta shift you
want to perform:
• One Way: The delta is calculated for a positive shift only.
• Two Way: The delta is calculated for a positive shift and
for a negative shift.
[2] Check the “Include Basis Risk” box to reflect the sensitivity to
shifts in the prices of the instruments used to build the basis curves
(so that the basis curves are regenerated) as well as to shifts in the
prices of the instruments used to build the curves.
OR
Clear the “Include Basis Risk” box to reflect the sensitivity to shifts
in the prices of the instruments used to build the curves only.

Confidential — Infinity 7.0 Partial Differential Hedge 45

 [3] Type the shift amount for the prices of the underlying instruments
in the “Underlying Shift Amount” field.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the PDH report

The rows of the report progress in time from short-term to medium-term

to long-term instruments. Each row indicates the effects of the hedge
analysis for each instrument.
Columns in the Partial Differential Hedge report

Column Name Contents

CCY Currency of the hedge instrument

Instrument Hedge instrument type

Description Hedge instrument description

Recommendation Recommended hedge to offset the sensitivity -

A positive amount recommends to take a long
position and a negative amount recommends
to take a short position - See the Infinity white
paper Partial Differential Hedge for the
calculation of the recommendation

Current Position Current position of the hedge instrument

Position Adjustment Current position minus recommendation - For

a perfect hedge, the position adjustment
should be equal to 0

Delta Up for Transaction Set Sensitivity of the transaction set to a positive

shift in the yield of the hedge instrument

Delta Down for Transaction Sensitivity of the transaction set to a negative

Set shift in the yield of the hedge instrument

Gamma for Transaction Set Sensitivity of the delta to a shift in the yield of
the hedge instrument

Delta Up for Hedge Vehicles Sensitivity of the hedge instruments to a

positive shift in their yield

Delta Down for Hedge Sensitivity of the hedge instruments to a

Vehicles negative shift in their yield

Gamma for Hedge Vehicles Sensitivity of the delta to a shift in the yield of
the hedge instrument

Displaying the Please refer to page 16 for information on the Display button.
report

46 Risk Analysis Reports Trader Guide to Risk Analysis

 Option Exercise
The Option Exercise report displays the options which expire within a
user-defined period for user-defined time buckets.

To perform the Option Exercise report, select the Analysis: Option

Exercise command from Trader’s main window. The Option Exercise
window is displayed.

Option Exercise window

General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to define the
period of analysis and the time buckets. You can save the specific
parameters as a template.

Time buckets The time bucket parameters allow you to divide each period of analysis
into discrete time units (buckets). Time buckets are defined by entering
values into the days, weeks, months and quarters fields in the Template
tab. The period of analysis is then divided into daily, weekly, monthly and
quarterly units.

Example: Assume that you will be generating a Option Exercise report

with the begin date June 15, 96 and the end date December 31, 1997. You
have entered the following values in the time bucket fields: 10 days, 4
weeks, 3 months, 1 quarter. The Option Exercise report will create the
following time buckets, starting on June 15th, 1996:

• 10 daily buckets from 6/15/96 to 6/24/96

• 4 weekly buckets from 6/25/96 to 7/22/96
• 3 monthly buckets from 7/23/96 to 10/22/96
• 1 quarterly bucket from 10/23/96 to 1/22/97

Confidential — Infinity 7.0 Option Exercise 47

 The remaining time from January 22, 1997 to December 31, 1997 (end
date) will be divided into as many semiannual buckets as possible: one
from 1/23/97 to 7/22/97 and a stub period of 7/23/97 to 12/31/97.

Setting the report Select a report type in the Report Type list. The only choice available is
type Option Exercise.

Setting the Select an existing template from the Template list or click on the
specific Template tab to set the specific parameters. The Template tab is
parameters displayed.

Option Exercise window

Template tab

[1] Set the Analysis Period.

The Start Date is defaulted to the valuation date. You can modify it.
Use the field next to the start date, to set a relative end date or use
the Final Date field to set a calendar end date. A relative end date is
set to a specified number of months from the start date.
[2] Set the Time Buckets.
Options are grouped into the time intervals that have been set in the
Time Buckets area of this tab, according to their expiration date.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

48 Risk Analysis Reports Trader Guide to Risk Analysis

 Fields in the Option Exercise report

The Option Exercise report groups the option trades into the user-defined
time buckets based on the expiration date of the options. For caps and
floors, the individual caplets are put into the appropriate buckets.
Columns of the Option Exercise report

Column Name Contents

Begin Date Begin date of the time bucket.

End date End date of the time bucket.

Transaction Transaction, trade and trade leg number

Number

Option Type Exercise type: American, European, Bermuda.

Maturity Date Trade expiration date

Payer Trade leg payer counterparty

Receiver Trade leg receiver counterparty

Security Type Trade leg security type: Future option, Swaption, Cap...

CCY Security currency

Description Underlying instrument description (details below)

Trade amount Underlying instrument amount

Payment Trade interest payment frequency

Frequency

Strike Trade strike price or strike rate

Exercise Date Trade expiration date

Money market and bond future options

The underlying description column contains exchange, currency, series
and contract information. The underlying amount column shows the
number of underlying futures contracts.

Caps and floors

The underlying description column contains currency, index and term
information. The underlying amount column lists the notional principal.

Swaptions
The underlying description column describes the underlying swap
(Example: 5yr 7.8% / USD LIBOR 3MONTH). The underlying amount
column lists the swap principal.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Option Exercise 49

 Option Greeks
The Option Greeks report provides an overall view of the exposures with
the analytical option measures, for all option type instruments:

• Delta — the change in the value of the option with respect to

a change of 1bp up in the value of the underlying instrument
• Gamma — the change in delta due to a change of 1 bp up in
the value of the underlying instrument
• Theta — the expected change in the value of an option due to
a one day decrease in time to expiration
• Vega — the change in value of an option due to a 1% change
in volatility

The Greek values calculations follow the standard Greek output from the
options pricing model. For further information on the methods used to
calculate Greek values for the different types of option instruments,
consult the Infinity Financial Analytics Glossary.

To perform the Option Greeks report, select the Analysis: Option Greeks
command from Trader’s main window. The Option Greeks window is
displayed.

Option Greeks window

General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to select the
Greek values you want to display. You can save the selected Greek values
as a template.

Setting the report Select a report type in the Report Type list. The only choice available is
type Option Greek Report.

Setting the Greek Select an existing template from the Template list or click on the
values Template tab to select the Greek values. The Template tab is displayed.

50 Risk Analysis Reports Trader Guide to Risk Analysis

 Option Greeks window
Template tab

Check the Greeks boxes corresponding to the Greek values you want to
display: Delta (PV01), Sensitivity of PV01 (Gamma), Theta and Vega.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Option Greeks report

The Option Greeks report displays the results by trade leg.

Columns of the Option Greeks report

Column Name Contents

Security Type Trade security type: CAP, BOND_OPTION...

Transaction Transaction, trade and trade leg number

Number

Maturity Date Trade expiration date

Payer Trade leg payer counterparty

Receiver Trade leg receiver counterparty

CCY Security currency

Description Trade leg security description

Payment Trade interest payment frequency

Frequency

Strike Trade strike

Trade amount Trade leg amount

Local CCY Trade leg currency

Delta (Local CCY) Delta expressed in trade currency

Confidential — Infinity 7.0 Option Greeks 51

 Columns of the Option Greeks report

Column Name Contents

Gamma (Local Gamma expressed in trade currency

CCY)

Vega (Local CCY) Vega expressed in trade currency

Theta (Local CCY) Theta expressed in trade currency

FX Rate Spot FX rate on the valuation date used to convert the

trade currency to the base currency

Delta (Base CCY) Delta expressed in base currency

Gamma (Base Gamma expressed in base currency

CCY)

Vega (Base CCY) Vega expressed in base currency

Theta (Base CCY) Theta expressed in base currency

NPV (Local CCY) NPV of the trade leg on the valuation date, expressed in
trade currency

NPV (Base CCY) NPV of the trade leg on the valuation date, expressed in
base currency

Displaying the Please refer to page 16 for information on the Display button.
report

52 Risk Analysis Reports Trader Guide to Risk Analysis

 Greeks PV01
The Greeks PV01 report provides an overall view of the PV01 exposures
with the numerical option measures on all instruments:

• Delta — the change in the value of an instrument with respect

to a change in the value of the curves
• Sensitivity of PV01 — the change in delta due to a change in
the value of the curves
• Theta — the expected change in the value of an instrument
due to a one day decrease in time to expiration
• Vega — the change in value of an instrument due to a change
in the volatilities

The calculation of the Greek values is performed as in the Parallel Shift

report and reports a change in NPV for user-defined shifts in curves and
volatilities.

To perform the Greeks PV01 report, select the Analysis: Greeks PV01
command from Trader’s main window. The Greeks PV01 window is
displayed.

Greeks PV01 window

General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to select the
Greek values you want to display and the shifts you want to apply to
calculate the option measures. You can save the specific parameters as a
template.

Setting the report Select a report type in the Report Type list. The only choice available is
type Greeks.

Confidential — Infinity 7.0 Greeks PV01 53

 Setting the Select an existing template from the Template list or click on the
specific Template tab to set the specific parameters. The Template tab is
parameters displayed.

Greeks PV01 window

Template tab

[1] Check the Greeks boxes corresponding to the Greek values you
want to display: Delta (PV01), Sensitivity of PV01, Theta and
Vega.
[2] Set the shifts you want to apply.
Type the shift (bp up) you want to apply to the curves in the “Rate
Shift (bp)” field, for Delta and Sensitivity of PV01 calculation.
Type the volatilities shift (% up) in the “Volatility Shift (%) field,
for Vega calculation.
The time shift for Theta calculation is set to 1 day for this version.
You cannot modify it.
[3] Click on the “Time Component Shift Method” radio button
corresponding to the way of moving curves forward you want:
• Move curves and valuation date forward
The interest rate curves are moved forward by “walking up
the forward curve”; the curves are altered by a relative
discount factor calculation so that implied forward rates on
fixed forward dates are the same on the original and the
moved curves. Discount factors on relative maturities
change under this method.
• Move curves forward
The base dates on the curves are moved but the zero yields
and discount factors associated with offsets to that base
date are not changed. This translates the curves
horizontally in time. While discount factors on relative
maturities do not change under this method, implied
forward rates on fixed forward dates are different between
the original and the moved curves.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

54 Risk Analysis Reports Trader Guide to Risk Analysis

 Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Greeks PV01 report

The Greeks PV01 report displays the results by trade leg.

The fields of the Greeks PV01 report are the same as for the Option
Greeks report (see page page 51). The last two NPV columns are not
available in this report.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Greeks PV01 55

 Rate Reset
The Rate Reset report calculates the sensitivity of the trades to rates that
will be setting in the future. This sensitivity is expressed as an estimated
change (est 01) in the reset value for a change in rates of 1 basis point.
The estimated value (est 01) is not discounted. The value est 01 can be
expressed as:

est 01 = principal x time x 0.0001

where principal is the actual principal plus the notional principal, plus or
minus amortization effect. Time is the number of days over which this rate
is setting, expressed in the day count basis of the index (e.g., ACT/360).

For example, imagine a floating swap leg that is set quarterly. The
notional principal of the swap is $10,000,000 USD and the leg is set using
the 3 month USD LIBOR index.

The Rate Reset report is broken down by index type (in this case, there is
only one index: USD 3 month LIBOR) and the rows correspond to the
user-defined time buckets (in this case, three quarterly buckets).

The report would show:

begin date end date est 01

2/9/95 5/8/95 250

5/9/95 8/8/95 250

8/9/95 11/9/95 250

... ... ...

The report states that in each three-month period between February 9,

1995 and November 8, 1995, ten million dollars worth of principal are
setting based on USD 3 month LIBOR. The sensitivity of the trade
(expressed as an est 01 value) is US$250 for each 3-month period.

To perform the Rate Reset report, select the Analysis: Rate Reset
command from Trader’s main window. The Rate Reset window is
displayed.

56 Risk Analysis Reports Trader Guide to Risk Analysis

 Rate Reset window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to define the
period of analysis and the time buckets. You can save the specific
parameters as a template.

Time buckets The time bucket parameters allow you to divide each period of analysis
into discrete time units (buckets). Time buckets are defined by entering
values into the days, weeks, months and quarters fields in the Template
tab. The period of analysis is then divided into daily, weekly, monthly and
quarterly units.

Example: Assume that you will be generating a Rate Reset report with the
begin date June 15, 96 and the end date December 31, 1997. You have
entered the following values in the time bucket fields: 10 days, 4 weeks, 3
months, 1 quarter. The Rate Reset report will create the following time
buckets, starting on June 15th, 1996:

• 10 daily buckets from 6/15/96 to 6/24/96

• 4 weekly buckets from 6/25/96 to 7/22/96
• 3 monthly buckets from 7/23/96 to 10/22/96
• 1 quarterly bucket from 10/23/96 to 1/22/97

The remaining time from January 22, 1997 to December 31, 1997 (end
date) will be divided into as many semiannual buckets as possible: one
from 1/23/97 to 7/22/97 and a stub period of 7/23/97 to 12/31/97.

Setting the report Select a report type in the Report Type list:
type
• Rate Reset Summary
This report calculates the net estimated changes in cash flows
for each user-defined time bucket and displays them
expressed in base currency only.
• Rate Reset Detailed
This report calculates the estimated changes in cash flows for
each user-defined time bucket and displays them by trade leg.

Confidential — Infinity 7.0 Rate Reset 57

 Setting the Select an existing template from the Template list or click on the
specific Template tab to set the specific parameters. The Template tab is
parameters displayed.

Rate Reset window

Template tab

[1] Set the Analysis Period.

The Start Date is defaulted to the valuation date. You can modify it.
Use the field next to the start date, to set a relative end date or use
the Final Date field to set a calendar end date. A relative end date is
set to a specified number of months from the start date.
[2] Set the Time Buckets.
Floating flows are grouped into the time intervals that have been set
in the Time Buckets area of this tab.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Rate Reset Detail report

This report displays only floating trade legs.

Columns in the Rate Reset Detail report

column name contents

Begin Date Start date of a time bucket

End Date End date of a time bucket

Reset Date Cash flow reset date

Transaction Transaction, trade and trade leg number

Number

Maturity Date Trade maturity date

Payer Trade leg payer counterparty

Receiver Trade leg receiver counterparty

58 Risk Analysis Reports Trader Guide to Risk Analysis

 Columns in the Rate Reset Detail report

column name contents

Security Type Trade leg security type: Future option, Swaption, Cap...

CCY Security currency

Description Trade leg security description

Payment Trade leg interest payment frequency

Frequency

Trade Amount Trade leg amount

Local CCY Trade leg currency

Estimated Flows Estimated cash flows expressed in trade currency

Local CCY

Est 01 Local CCY Estimated change in cash flows for a 1bp shift in rates,
expressed in trade currency

FX Rate The spot FX rate on the valuation date used to convert

the trade currency to the base currency

Estimated Flows Estimated cash flows expressed in base currency

Base CCY

Est 01 Base CCY Estimated change in cash flows for a 1bp shift in rates,
expressed in base currency

Fields in the Rate Reset Summary report

Columns in the Rate Reset Summary report

column name contents

Begin Date Start date of a time bucket

End Date End date of a time bucket

Base CCY Net estimated cash flows for this period, expressed in
Estimated Flows base currency

Base CCY Net estimated change in cash flows for a 1bp shift in
Sensitivity 01 rates for this period, expressed in base currency

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Rate Reset 59

 Profit and Loss
The Profit and Loss report enables you to analyze the profit and loss of a
portfolio, on a daily basis, or month-to-date, or quarter to date, or year-to-
date or for a user-defined period. The profit and loss is defined as the
change in MTM values and the change in cash accounts.

Overview
The report calculates P&L based on the end-of-day mark to market (EOD
MTM) values stored in the database. If EOD MTM values are not
available on the analysis end date, the report will calculate P&L based on
estimated MTM values. This allows the P&L report to be produced before
the end of the day.

Underlying P&L is defined as the difference in MTM (excluding cash) between the
Concept end date and the start date of an analysis period, plus any cash accrued
after the start date. EOD MTM values and accrued cash are calculated and
stored by the EOD MTM Fixing utility.

Cash Accounts Cash accounts are attached to a portfolio to keep track of cash positions.
A cash account is created for each portfolio/currency and for futures, a
cash account is created for each portfolio/future security.

The EOD fixing utility is responsible for creating cash accounts and
maintaining their balances. The utility will create a new cash account for
a portfolio if a new trade with a currency or futures position not covered
by existing cash accounts is entered. For new currency cash accounts, the
utility will automatically name the cash account by the currency code, and
for new futures cash accounts, the account will be named by the security
id of the futures security. For back-tracking purposes, once a cash account
is created, it will never be removed even if its balance drops to 0.

The cash accounts are updated with every EOD MTM fixing. If there is
activity today in the account, the accumulated cash balance is updated by
adding today’s cash to yesterday’s accumulated cash balance. The
yesterday’s accumulated cash balance is rolled over if there is no activity
in the account today.

For all trades besides futures trades, all cash inflow and outflow is
recorded into the proper cash account corresponding to the trade currency.
This includes actual cash flows in securities, cash settlements (currency
trade legs) and trade commissions. For futures trades, all daily margin
payments are recorded into the cash accounts of the futures security.

60 Risk Analysis Reports Trader Guide to Risk Analysis

 Performing the EOD Process
In order to produce reliable P&L values, the report requires MTM values
of a portfolio be officially fixed at the end of each business day. The
fixing utility provides the facility to store end-of-day MTM values and
cash accounts accruals to the database.

Once the end-of-day values are fixed, they cannot be modified using the
fixing utility, please refer to the EOD Refixing process on page 65. Stored
EOD MTM values can be loaded for browsing by running the utility on a
portfolio that has already been fixed, for the chosen valuation date.

To perform the EOD process, select the Analysis: EOD command from
Trader’s main window. The EOD version of the Profit & Loss window is
displayed.

EOD version of the

Profit & Loss window
General tab

The General tab enables you to set general parameters to perform the
process.

Setting the Select a portfolio in the Portfolio Name list. The portfolio name is
portfolio defaulted to the portfolio chosen in Trader’s main window. The report
will analyze the trades in the selected portfolio.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Setting the base Select a base currency in the Base Currency list. The base currency is
currency defaulted to the base currency chosen in Trader’s main window. The
currencies in your portfolio will be converted to the base currency for
display in the reports. If an FX rate is missing, the system will return an
error message. To input FX rates, use the Utilities: Market Data: FX Rates
command from Trader’s main window.

Confidential — Infinity 7.0 Profit and Loss 61

 Setting the Click on the “Official EOD Fixing” radio button to perform the EOD
process you want process.
to perform
You can also invoke the EOD Refixing process and the Profit & Loss
report from this window by clicking on the corresponding radio button.
Please see page 65 and page 67 respectively.

Setting the report Select a report type in the Report Type list. The only choice available is
type End of Day Fixing.

Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the EOD Fixing report

The EOD fixing report contains two areas: one for the cash accounts and
one for the trade legs.
Columns in the EOD Fixing report—Cash Accounts area

Column Name Contents

Currency Cash account currency - Cash account

identification

Previous Cash Account Amount of cash accumulated before the valuation

date, expressed in cash account currency

Today’s Cash Amount of cash paid or received on the valuation

date, expressed in cash account currency

Acc Cash (Local CCY) Previous cash account plus Today’s cash,
expressed in cash account currency

Acc Cash (Base CCY) Previous cash account plus Today’s cash,
expressed in base currency

Columns in the EOD Fixing report—Trade Information area

Column Name Contents

Trans Number Transaction, trade and trade leg number

Security Type Trade security type: CAP, SWAP_LEG, FRA...

CCY Security currency

Description Trade leg security description

Trade Amount Trade leg amount

Status Trade state identification: new, matured, removed

or added - filled only in the EOD Refixing report

62 Risk Analysis Reports Trader Guide to Risk Analysis

 Columns in the EOD Fixing report—Trade Information area

Column Name Contents

Local CCY Trade leg currency

NPV (Local CCY) NPV of the trade leg on the valuation date,
expressed in trade currency

Today’s Cash (Local Cash received or paid on the valuation date for the
CCY) trade leg, expressed in trade currency

Acc Cash (Local CCY) Amount of cash accumulated before the valuation
date plus Today’s cash, expressed in trade
currency

Accrual (Local CCY) Accrued interest on the valuation date, expressed

in trade currency

FX Rate Spot FX rate on the valuation date used to convert

the trade currency to the base currency

NPV (Base CCY) NPV of the trade leg on the valuation date,
expressed in base currency

Today’s Cash (Base Cash received or paid on the valuation date for the
CCY) trade leg, expressed in base currency

Acc Cash (Base CCY) Amount of cash accumulated before the valuation
date plus Today’s cash expressed, in base
currency

Accrual (Base CCY) Accrued interest on the valuation date, expressed

in base currency

Saving the report Select the Save to Database command from the File menu in the Report
window to save the report on the valuation date.

You can also save the report on closing dates as End of Month, End of
Quarter or End of Year report: click on the Fixing Flags button in the
General tab. The Fixing Flags window is displayed.

Fixing Flags window

To display an existing EOD report:

• Type a date in the Fixing Date field and click on the Add
button.
OR

Confidential — Infinity 7.0 Profit and Loss 63

 • Check the “Show all fixing dates” box to display all the
existing EOD reports.

The existing EOD Fixing reports are displayed in a table. To save an EOD
Fixing report as an End of Month, an End of Quarter and an End of Year
report, double click in the corresponding cell. A cross appears in the cell,
meaning the flag is set for this report and this closing date. To clear a cell,
double click in it again.

Click on the Save button when you are done.

Displaying the Please refer to page 16 for information on the Display button.
report

Adjusting the Once you have performed the EOD process, you can adjust the cash
cash accounts accounts by clicking on the “Cash A/c Adj” button. This feature can be
used for reconciliation, capturing interest on account balance or resetting
cash balances. The Cash Account Adjustments window is displayed.

Cash Account
Adjustments window

[1] Select a cash account in the Account list.

[2] Type an adjustment amount in the Amount field. This amount will
be added to the cash account balance.
[3] Type a description in the Remark field. This description may be
used for back-tracking purposes.
[4] Click on the Add button. You can add several adjustments.
[5] Click on the Save button when you are done.

Deleting EOD You can delete EOD fixing records from the database by clicking on the
fixing records Fixing Cleanup button. The Fixing Cleanup window is displayed.

Fixing Cleanup window

Select the From Date and To Date fields and click on the Delete button.

64 Risk Analysis Reports Trader Guide to Risk Analysis

 Performing the EOD Refixing Process
Refixing EOD MTM values is required when errors are discovered in an
existing EOD fixing. Note that an error can cause all the EOD values
subsequent to the day when the error occurs to become invalid. For
instance, a trade amended two days ago will require the day before,
yesterday’s and today’s EOD values to be refixed. The utility will
automatically refix all EOD records subsequent to the refix date.

For each refix, the utility produces a report displaying updated MTM
values and identifying the trades that brought up the modifications: new,
matured, removed or added.

To perform the EOD Refixing process, select the Analysis: EOD Refixing
command from Trader’s main window. The EOD Refixing version of the
Profit & Loss window is displayed.

EOD Refixing window of

the Profit & Loss window
General tab

The General tab enables you to set general parameters to perform the
process.

Setting the Select a portfolio in the Portfolio Name list. The portfolio name is
portfolio defaulted to the portfolio chosen in Trader’s main window. The report
will analyze the trades in the selected portfolio.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Setting the base Select a base currency in the Base Currency list. The base currency is
currency defaulted to the base currency chosen in Trader’s main window. The
currencies in your portfolio will be converted to the base currency. If an
FX rate is missing, the system will return an error message. To input FX
rates, use the Utilities: Market Data: FX Rates command from Trader’s
main window.

Confidential — Infinity 7.0 Profit and Loss 65

 Setting the Click on the “(Re) Calc EOD MTM” radio button to perform the EOD
process you want Refixing process.
to perform
You can also invoke the EOD process and the Profit & Loss report from
this window by clicking on the corresponding radio button. Please see
page 61 and page 67 respectively.

Setting the report Select a report type in the Report Type list. The only choice available is
type End of Day Fixing.

Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the EOD Refixing report

The EOD Refixing report fields are the same as the EOD Fixing report
fields (see page 62). The Status column provides the state of the trades
that brought up the modifications.

Displaying the Please refer to page 16 for information on the Display button.
report

66 Risk Analysis Reports Trader Guide to Risk Analysis

 Performing the Profit & Loss Report
P&L is defined as the difference in MTM (excluding cash) between the
end date and the start date of an analysis period plus any cash accrued
after the start date. EOD MTM values and accrued cash are calculated and
stored by the EOD MTM fixing utility.

If MTM values have already been fixed for the valuation date, P&L is
simply the difference in the EOD MTM values on the analysis start date
and end date plus cash accumulated over the analysis period. If EOD
values have not been fixed, estimated EOD values will be used. Estimated
EOD values are calculated as if the fixing occurs at the time of the
analysis.

To perform the Profit & Loss report, select the Analysis: PNL command
from Trader’s main window. The Profit & Loss window is displayed.

Profit & Loss window

General tab

The General tab enables you to set general parameters to perform the
report. The Template tab enables you to set the P&L analysis period. You
can save the analysis period as a template.

Setting the Select a portfolio in the Portfolio Name list. The portfolio name is
portfolio defaulted to the portfolio chosen in Trader’s main window. The report
will analyze the trades in the selected portfolio.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Setting the Click on the “Profit and Loss” radio button to perform the Profit & Loss
process you want report.
to perform
You can also invoke the EOD process and the EOD Refixing process
from this window by clicking on the corresponding radio button. Please
see page 61 and page 65 respectively.

Confidential — Infinity 7.0 Profit and Loss 67

 Setting the report Select a report type in the Report Type list:
type
• PNL Report
This report calculates the PNL by security type and provides
details by trade leg.
• PNL Summary Report
This report calculates the PNL by security type and displays
it expressed in base currency only.
Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Setting the P&L Select an existing template from the Template list or click on the
analysis period Template tab to set the P&L analysis period. The Template tab is
displayed.

Profit & Loss window

Template tab

Click on the “P&L Analysis Period” radio button you want:

• Daily
The P&L is calculated between the revaluation date and the
previous day.
• Month to Date
The P&L is calculated between the revaluation date and the
first day of the revaluation month.
• Quarter to Date
The P&L is calculated between the revaluation date and the
first day of the revaluation quarter.
• Year to Date
The P&L is calculated between the revaluation date and the
first day of the revaluation year.
• Custom
You can choose a Relative analysis period or a Fixed analysis
period by clicking on the corresponding radio button.

68 Risk Analysis Reports Trader Guide to Risk Analysis

 Relative: type a number of days in the Offset Days field. The P&L is
calculated between the revaluation date and the revaluation date minus
the specified number of days.
Fixed: type the start date and the end date in the From / To fields. The
P&L is calculated between the specified from and to dates.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

When you run the P&L report, the system checks if the EOD Fixing has
been done. If EOD values have not been fixed, the process calculates
automatically estimated EOD values.

When the profit and loss analysis shifts the analysis date, individual
trades from the portfolio are excluded or included, depending on their
trade date and maturity date. When Trader calculates the NPV for a date
preceding the valuation date, it ignores any reset events that have
occurred between the previous date and the current valuation date. For
example, if the fixing date of a rate falls between the valuation date and
an earlier second analysis date, the profit and loss analysis does not
consider that rate as fixed when evaluating the NPV of the portfolio on
the earlier date.

The settlement trade legs are grouped together with the primary trade leg
even though the settlement legs might not be of the same security type as
the primary leg (the portfolio has to be set up to include the settlement
legs). For instance, the cash settlement leg in a money market trade is
shown together with the money market trade leg. In order to calculate
P&L for a trade or for a position, settlement legs with settlement date
within the P&L analysis period are included even if they are settled before
the fixing date. This is necessary as the settlement leg records the
inception cost of the trade.

For OTC instruments, trades are categorized by trade type. Within each
trade type, trades are separated by active trades, new trades and matured
trades. Change in MTM, change in accumulated cash are reported for
each trade leg and P&L is reported for each trade.

For exchange traded instruments, P&L for positions instead of trades is

reported. Change in MTM and accumulated cash for trades of the same
security (both the primary and the settlement trade legs) are aggregated to
calculate the position’s change in MTM and accumulated cash. The net of
the position’s change in MTM and accumulated cash is the Trade P&L.
Note the categorization of new trades, matured trades and active trades
does not apply to exchange traded instruments. The change in number of
contracts is reported instead.

Confidential — Infinity 7.0 Profit and Loss 69

 Examples of results obtained for a swap trade:

• On the trade date

Yesterday’s MTM and accumulated cash are 0. The P&L for
the trade is simply the net of the two swap legs’ NPV.
• On any date between the trade date and the maturity date
Yesterday’s MTM and accumulated cash values are obtained
from yesterday’s MTM fixing entries stored in the database.
Today’s MTM and accumulated cash values are estimated on
if EOD fixing has not been done. The P&L is the change in
MTM values plus the change in accumulated cash balance.
• On the maturity date
Note that the MTM of the swap is 0 while today’s cash
captures all the value of the swap. The big drop in MTM
values as shown in delta MTM is compensated by the change
in accumulated cash balance.

Fields in the Profit & Loss report

The P&L report contains three areas: a P&L Summary, the P&L by
Security Type (detailed by trade leg) and the Cash Accounts.

The P&L summary area contains the total change in cash accounts, the
total change in MTM and the total P&L for the portfolio.

The Security Type area is sorted by security type and contains the
columns described below for each trade leg.
Columns in the Profit and Loss report—Security Type area

Column Name Contents

Trans Number Transaction, trade and trade leg number

CCY Security currency

Description Trade leg security description

Trade Amount Trade leg amount

Start MTM Local CCY The NPV of the trade leg on the start date,
expressed in trade currency

End MTM Local CCY The NPV of the trade leg on the valuation date,
expressed in trade currency

Delta MTM Local CCY End MTM minus Start MTM, expressed in trade
currency

Cash Local CCY Cash received or paid between the start date and
the valuation date for the trade leg, expressed in
trade currency

P&L Local CCY Delta MTM plus Cash, expressed in trade currency

Trade P&L Local CCY Total P&L of the trade legs of the trade expressed,
in trade currency

70 Risk Analysis Reports Trader Guide to Risk Analysis

 Columns in the Profit and Loss report—Security Type area

Column Name Contents

Start FX The spot FX rate on the start date used to convert

the trade currency to the base currency

FX The spot FX rate on the valuation date used to

convert the trade currency to the base currency

Start MTM Base CCY The NPV of the trade leg on the start date,
expressed in base currency

End MTM Base CCY The NPV of the trade leg on the valuation date,
expressed in base currency

Delta MTM Base CCY End MTM minus Start MTM, expressed in base
currency

Cash Base CCY Cash received or paid between the start date and
the valuation date for the trade leg, expressed in
base currency

P&L Base CCY Delta MTM plus Cash, expressed in base currency

Trade P&L Base CCY Total P&L of the trade legs of the trade, expressed
in base currency

Columns in the Profit and Loss report—Cash Accounts area

Column Name Contents

Currency Cash account currency

Start Balance Local Amount of cash accumulated on the start date,

CCY expressed in cash account currency

End Balance Local CCY Amount of cash accumulated on the valuation date,
expressed in cash account currency

Delta Balance Local End Balance minus Start Balance, expressed in

CCY cash account currency

FX The spot FX rate on the valuation date used to

convert the cash account currency to the base
currency

Start Balance Base Amount of cash accumulated on the start date,

CCY expressed in base currency

End Balance Base CCY Amount of cash accumulated on the valuation date,
expressed in base currency

Delta Balance Base End Balance minus Start Balance, expressed in

CCY base currency

Profit & Loss Summary report fields

The P&L Summary report contains the same areas as the P&L report. It
contains only the columns expressed in base currency.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Profit and Loss 71

 Profit and Loss Decomposition
The P&L Decomposition report provides an explanation of the daily
profit and loss, dividing the results into the following components:

• new trades
• matured or cancelled trades
• amended trades
• active trades

For active trades, the P&L is decomposed into:

• P&L from time decay

• P&L from cash reset
• P&L from closing price change
• P&L from interest curve/surface change
• P&L from FX change

The P&L Decomposition report displays P&L from each decomposition

component for each type of trade.

Overview
Underlying New trades are trades originated on the valuation date.
Concept
Matured and cancelled trades are trades that are removed from the report
on the valuation date.

Amended trades are trades that have been modified since yesterday’s
refixing.

For the decomposition components of an active trade, P&L from a

decomposition component is defined as the difference in NPV before and
after the component is applied. For instance, P&L from curve change is
the difference between the NPV using yesterday’s curves moved forward
and the NPV using today’s curves.

There are two ways in which a decomposition could be applied. The

decomposition components could vary independently or they could be
applied on top of each other. Trader implements the latter methodology.
Under this methodology, the sum of the P&L from all the components is
equivalent to the total P&L. However, the order in which the components
are applied is significant and will affect the results of the components.

72 Risk Analysis Reports Trader Guide to Risk Analysis

 The available decomposition orders are:

• time, reset, closing price, curve, volatility, FX

• time, reset, closing price, volatility, curve, FX
• time, reset, closing price, curve, spread, volatility, FX
• time, reset, closing price, volatility, curve, spread, FX

The last two decomposition sequences (“time, reset, closing price, curve,
spread, volatility, FX” and “time, reset, closing price, volatility, curve,
spread, FX”) enable you to identify the P&L due to changes in spreads
between curves. You must designate a base curve in each currency to
perform this decomposition.

Please refer to the “Profit and Loss Decomposition” on page 104 for
details on the P&L decomposition calculations.

Performing the Profit & Loss Decomp Report

Before performing the Profit & Loss Decomposition report, you need to
perform the EOD Fixing process on the valuation date and on the date
before, as this report will decompose the daily P&L.

To perform the Profit & Loss Decomposition report, select the Analysis:
PNL Decomp command from Trader’s main window. The P & L
Decomposition window is displayed.

P & L Decomposition
window
General tab

The General tab enables you to set general parameters to perform the
report, see details on page 15. The Template tab enables you to set the
decomposition order and the method to move curves forward. You can
save the specific parameters as a template.

Setting the report Select a report type in the Report Type list. The only choice available is
type PNL Decomposition.

Confidential — Infinity 7.0 Profit and Loss Decomposition 73

 Setting the Select an existing template from the Template list or click on the
specific Template tab to set the specific parameters. The Template tab is
parameters displayed.

P & L Decomposition
window
Template tab

[1] Click on the “P/L Decomposition Analysis Parameters” radio but-

ton corresponding to the decomposition order you want to use:
• Time, Reset, Price, Curve, Vol, FX
• Time, Reset, Price, Vol, curve, FX
• Time, Reset, Price, Curve, Spread, Vol, FX
If you choose this option, click on the Assign Base Curve
button to assign base curves by currency. The Base Curve
Assignment window is displayed. See the section on this
window below.
• Time, Reset, Price, Vol, Curve, Spread, FX
If you choose this option, click on the Assign Base Curve
button to assign base curves by currency. The Base Curve
Assignment window is displayed. See the section on this
window below.
[2] Click on the “Time Component Method” radio button
corresponding to the method of moving curves forward you want:
• Move curve and valuation date forward
The interest rate curve is moved forward by “walking up
the forward curve”; the curve is altered by a relative
discount factor calculation so that implied forward rates on
fixed forward dates are the same on the original and the
moved curve. Discount factors on relative maturities
change under this method.
• Move curve forward
The base date on the curve is moved, but the zero yields
and discount factors associated with offsets to that base
date are not changed. This translates the curve horizontally
in time. While discount factors on relative maturities do
not change under this method, implied forward rates on
fixed forward dates are different between the original and
the moved curve.

74 Risk Analysis Reports Trader Guide to Risk Analysis

 Optional: Click on the Save Template button to update the changes. To
create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Please refer to the “Profit and Loss Decomposition” on page 104 for
details on the P&L decomposition calculations.

Fields in the Profit & Loss Decomposition report

The P&L Decomposition report groups the trades in a matrix that displays
the total P&L by trade category (New Trades, Matured Trades, Amended
Trades or Active Trades) on one axis and security types on the other axis.
For the active trades, the decomposition is displayed by components:
P&L from time Decay, P&L from Reset, P&L from Price Changes, P&L
from Curve Changes and P&L from FX Changes.

Displaying the Please refer to page 16 for information on the Display button.
report

Base Curve Assignment window

The Base Curve Assignment window enables you to assign base curves to
each currency for the decomposition orders using the spread component
(“time, reset, closing price, curve, spread, volatility, FX” and “time, reset,
closing price, volatility, curve, spread, FX”).

Base Curve
Assignment window

Select a currency and select a curve in the corresponding lists. Click on

the Add button to add the selected base curve to the Assigned Base
Curves list. All other interest curves in the selected currency will be
represented by using a spread from this base curve. You must select a
base curve for each currency in your portfolio.

Click on the OK button when you are done.

Confidential — Infinity 7.0 Profit and Loss Decomposition 75

 Accrual Profit and Loss
Please note that this feature does not work in Trader version 7.0 but will
be available in a patch release.

The accrual P&L report enables you to analyze the decomposition of the
cash flows into: realized cash, earned accrual values and unearned accrual
values. The analysis can be done on a daily basis, month-to-date, quarter
to date, year-to-date, or for a user-defined period.

Overview
The report calculates the decomposition of accrued interests based on the
end-of-day accrual (Accrual EOD) values stored in the database. If EOD
Accrual values are not available on the analysis end date, the report will
base its calculation on estimated Accrual values. This allows the Accrual
P&L report to be produced before the end of the day.

The cash flows that are subject to accrual P&L are:

• Interest
• Fees
• Premiums
• Principals on swaps (to amortize the difference between
initial and final principal exchanges)

The accrual P&L for a period is the realized cash plus earned accrual
values minus unearned accrual values.

Tv-ValuationDate
CF1 CF2 CF3

A1 A2
t1 t2 t3 t4 Time
Tv

T1 T1-T2 Reporting Period T2

Realized cash This is the cash flow amount that occurs between the start date and the
valuation date of the report: between T1 and Tv in the diagram above, so
that CF1 and CF2 are realized cash flows.

76 Risk Analysis Reports Trader Guide to Risk Analysis

 Earned accrual This is the cash flow amount that is accrued between the last realized cash
value flow (or start date) and the valuation date of the report: between t3 and Tv
in the diagram above, so that the A1 portion of CF3 is earned.

Unearned accrual This is the amount of cash flow that is accrued between the valuation date
value and the end date of the report: between Tv and T2 in the diagram above, so
that the A2 portion of CF3 is unearned.

Performing the Accrual EOD Process

In order to produce reliable results, the report requires Accrual values be
officially fixed at the end of each business day. The fixing utility provides
the facility to store end-of-day Accrual values to the database.

Once the end-of-day accrual values are fixed, they cannot be modified
using the fixing utility, please refer to the Accrual EOD Refixing process
page 82. Stored Accrual EOD values can be loaded for browsing by
running the utility on a portfolio that has already been fixed.

To perform the Accrual EOD process, select the Analysis: Accrual EOD
command from Trader’s main window. The Accrual EOD version of the
Accrual Profit & Loss window is displayed.

Accrual EOD version of

the Accrual Profit & Loss
window
General tab

The General tab enables you to set general parameters to perform the
process. The Template tab enables you to define the accrual period. You
can save the specific parameters as a template.

Setting the Select a portfolio in the Portfolio Name list. The portfolio name is
portfolio defaulted to the portfolio chosen in Trader’s main window. The report
will analyze the trades in the selected portfolio.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Confidential — Infinity 7.0 Accrual Profit and Loss 77

 Setting the base Select a base currency in the Base Currency list. The base currency is
currency defaulted to the base currency chosen in Trader’s main window. The
currencies in your portfolio will be converted to the base currency. If an
FX rate is missing, the system will return an error message. To input FX
rates, use the Utilities: Market Data: FX Rates command from Trader’s
main window.

Setting the Click on the “Official EOD Accrual Fixing” radio button to perform the
process you want Accrual EOD process.
to perform
You can also invoke the Accrual EOD Refixing process and the Accrual
Profit & Loss report from this window by clicking on the corresponding
radio button. Please see page 82 and page 84 respectively.

Setting the report Select a report type in the Report Type list. The only choice available is
type End of Day Accrual Fixing.

Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Setting the Select an existing template from the Template list or click on the
accrual period Template tab to set the accrual period. The Template tab is displayed.

Accrual EOD version of

the Accrual Profit & Loss
window
Template tab

Click on the “P&L Analysis Period” radio button you want to set the
accrual start period:

• Daily
Realized cash & earned accrual values are calculated between
the revaluation date and the previous day.
• Month to Date
Realized cash & earned accrual values are calculated between
the revaluation date and the first day of the revaluation
month.

78 Risk Analysis Reports Trader Guide to Risk Analysis

 • Quarter to Date
Realized cash & earned accrual values are calculated between
the revaluation date and the first day of the revaluation
quarter.
• Year to Date
Realized cash & earned accrual values are calculated between
the revaluation date and the first day of the revaluation year.
• Custom
You can choose a Relative analysis period or a Fixed analysis
period by clicking on the corresponding radio button.
Relative: type a number of days in the Offset Days field.
Realized cash & earned accrual values are calculated between
the revaluation date and the revaluation date minus the
specified number of days.
Fixed: type the start date and the end date in the From / To
fields. Realized cash & earned accrual values are calculated
between the specified from and to dates.

The “Accrual Calculation Date” area enables you to set the end date of the
accrual period by clicking on the Relative or Fixed radio buttons.

• Relative
Type a number of days in the Offset Days field. The accrual
are calculated up to the valuation date plus the specified
number of days.
• Fixed
Type the end date in the Date field. The accrual values are
calculated up to the specified date.

Optional: Click on the Save Template button to update the changes. To

create a new template, please refer to “Creating a new template” on
page 16.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Accrual EOD report

This version handles cash flows as follows:

• Treatment of interest cash flows

Accrual values for an interest cash flow are assigned to the
“Realized”, “Earned” and “Unearned” categories explained
in the overview.

Confidential — Infinity 7.0 Accrual Profit and Loss 79

 • Treatment of premiums
The following methods are implemented in this initial release
(no amortization is done):
>> Swaption premiums
A swaption premium is posted as “Realized” at the time of
either exercise or expiry. If the date of exercise or expiry is
included in a given reporting period, the whole amount
shows up as profit or loss for the period.
>> Cap and floor premiums
Cap and floor premiums are treated slightly differently
from swaption premiums in that they are posted as “Real-
ized” as they occur. So, if the payment date of a cap pre-
mium is included in a given reporting period, it shows as
profit or loss of the period.
• Treatment of Fees
>> Swaps and cap/floor fees
The fee is amortized over the life of the transaction. The
amortization period is between the period begin date of the
first cash flow (caplet) and the period end date of the final
cash flow. Once the amortization period is determined, the
calculation is identical to that of interest cash flows.
>> FRA settlement fee
It is posted as “Earned” on the date its reset is done and the
payment amount is determined. Once its payment occurs
(a couple of business days after the reset), it is posted as
“Realized”. Note that once the settlement fee is posted as
“Earned”, it shows as profit and loss if a given period
includes the day on which the fee amount is determined.
• Treatment of Principals
The difference between initial and final principal exchanges
is amortized over the life of the swap; that is, between the
period begin date of the first cash flow and the period end
date of the final cash flow. The calculation is the same as that
of interest cash flows.

The Accrual EOD report contains one area that shows the results for each
trade leg and for each cash flow.
Columns in the Accrual EOD report

Column Name Contents

Transaction Number Transaction, trade and trade leg number

Security Type Trade security type: CAP, SWAP_LEG, FRA...

Description Trade leg security description

Book Name Trade leg book

Accrual Flow Type Trade cash flow type: interest, principal, fee or
premium

80 Risk Analysis Reports Trader Guide to Risk Analysis

 Columns in the Accrual EOD report

Column Name Contents

CCY Security currency

Leg Type Trade leg type

Trade Amount Trade leg amount

Status Trade state identification: new, matured, removed

or added - filled only in the Accrual EOD Refixing
report

Local CCY Trade leg currency

Earned (Local CCY) Earned accrual value for this cash flow in the
selected reporting period, expressed in trade
currency

Unearned (Local CCY) Unearned accrual value for this cash flow in the
selected reporting period, expressed in trade
currency

Realized (Local CCY) Realized cash for this cash flow in the selected
reporting period, expressed in trade currency

FX Rate Spot FX rate on the valuation date used to convert

the trade currency to the base currency

Earned (Base CCY) Earned accrual value for this cash flow in the
selected reporting period, expressed in base
currency

Unearned (Base CCY) Unearned accrual value for this cash flow in the
selected reporting period, expressed in base
currency

Realized (Base CCY) Realized cash for this cash flow in the selected
reporting period, expressed in base currency

Saving the report Select the Save to Database command from the File menu in the Report
window to save the report on the valuation date.

You can also save the report on closing dates as End of Month, End of
Quarter or End of Year report: click on the Fixing Flags button in the
General tab. The Fixing Flags window is displayed.

Displaying the Please refer to page 16 for information on the Display button.
report

Deleting Accrual You can delete Accrual EOD fixing records from the database by clicking
EOD fixing records on the Fixing Cleanup button. The Fixing Cleanup window is displayed.

Confidential — Infinity 7.0 Accrual Profit and Loss 81

 Performing the Accrual EOD Refixing Process
Refixing accrual EOD values is required when errors are discovered in an
existing Accrual EOD report. Note that an error can cause all the Accrual
EOD values subsequent to the day when the error occurs to become
invalid. For instance, a trade amended two days ago will require the day
before, yesterday’s and today’s Accrual EOD values to be refixed. The
utility will automatically refix all Accrual EOD records subsequent to the
refix date.

For each refix, the utility produces a report displaying updated accrual
values and identifying the trades that brought up the modifications: new,
matured, removed or added.

To perform the Accrual EOD Refixing process, select the Analysis:

Accrual EOD Refixing command from Trader’s main window. The
Accrual EOD Refixing version of the Accrual Profit & Loss window is
displayed.

Accrual EOD Refixing

version of the Accrual
Profit & Loss window
General tab

The General tab enables you to set general parameters to perform the
process. The Template tab enables you to define the accrual period. You
can save the specific parameters as a template and you can use the same
template as for the Accrual EOD process, see page 78.

Setting the Select a portfolio in the Portfolio Name list. The portfolio name is
portfolio defaulted to the portfolio chosen in Trader’s main window. The report
will analyze the trades in the selected portfolio.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Setting the base Select a base currency in the Base Currency list. The base currency is
currency defaulted to the base currency chosen in Trader’s main window. The
currencies in your portfolio will be converted to the base currency. If an
FX rate is missing, the system will return an error message. To input FX

82 Risk Analysis Reports Trader Guide to Risk Analysis

 rates, use the Utilities: Market Data: FX Rates command from Trader’s
main window.

Setting the Click on the “(Re) Calc EOD Accrual” radio button to perform the
process you want Accrual EOD Refixing process.
to perform
You can also invoke the Accrual EOD process and the Accrual Profit &
Loss report from this window by clicking on the corresponding radio
button. Please see page 77 and page 84 respectively.

Setting the report Select a report type in the Report Type list. The only choice available is
type End of Day Accrual Fixing.

Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Accrual EOD Refixing report

The Accrual EOD Refixing report fields are the same as for the Accrual
EOD report (see page 79). The Status column provides the state of the
trades that brought up the modifications.

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Accrual Profit and Loss 83

 Performing the Accrual Profit & Loss Report
Accrual P&L is defined as the accrual value of a cash flow during a user-
defined period: realized cash plus earned accrual value minus unearned
accrual value.

If Accrual EOD values have not been fixed on the accrual end date,
estimated values will be used. Estimated Accrual EOD values are
calculated as if the fixing occurs at the time of the analysis.

To perform the Accrual Profit & Loss report, select the Analysis: Accrual
PNL command from Trader’s main window. The Accrual Profit & Loss
window is displayed.

Accrual Profit & Loss

window
General tab

The General tab enables you to set general parameters to perform the
process. The Template tab enables you to define the accrual period. You
can save the specific parameters as a template and you can use the same
template as for the Accrual EOD process, see page 78.

Setting the Select a portfolio in the Portfolio Name list. The portfolio name is
portfolio defaulted to the portfolio chosen in Trader’s main window. The report
will analyze the trades in the selected portfolio.

Setting the Type a valuation date in the Valuation Date field. The valuation date is
valuation date defaulted to the system date.

Setting the Click on the “Profit and Loss” radio button to perform the Profit & Loss
process you want report.
to perform
You can also invoke the Accrual EOD process and the Accrual EOD
Refixing process from this window by clicking on the corresponding
radio button. Please see page 77 and page 82 respectively.

Setting the report Select a report type in the Report Type list. The only choice available is
type “Accrual PNL Report”.

84 Risk Analysis Reports Trader Guide to Risk Analysis

 Setting the Select a valuation model in the Model Association list. The valuation
valuation model model is defaulted to the valuation model chosen in Trader’s main
window. The valuation model provides the models and the market data
used to price the trades. Please refer to the Infinity Trader Reference
Guide to create and modify valuation models.

Performing the Click on the Run Report button to perform the report calculations. The
report Report window is displayed and shows the results.

Fields in the Accrual Profit & Loss report

The Accrual P&L report contains two areas: a P&L Summary and the
P&L by Security Type (detailed by trade leg).

The P&L summary area contains the total change in accrual and the total
P&L for the portfolio.

The Security Type area is sorted by security type and contains the
columns described below for each trade leg.
Columns in the Accrual Profit and Loss report—Security Type area

Column Name Contents

Transaction Number Transaction, trade and trade leg number

CCY Security currency

Description Trade leg security description

Book Name Trade leg book

Accrual Flow Type Trade cash flow type: interest, principal, fee or
premium

Trade Amount Trade leg amount

Start Accrual (Local Realized cash plus earned accrual value minus
CCY) unearned accrual value on the start date,
expressed in trade currency

End Accrual (Local Realized cash plus earned accrual value minus
CCY) unearned accrual value on the end date, expressed
in trade currency

Delta Accrual (Local End accrual minus start accrual, expressed in trade
CCY) currency

Displaying the Please refer to page 16 for information on the Display button.
report

Confidential — Infinity 7.0 Accrual Profit and Loss 85

 Chapter 3

Scenario Builder

Scenario Builder Overview

Scenario Builder allows users to build complex customized scenarios for
modeling various market conditions. Scenarios, also referred to as
“processes” in the application, are built by combining portfolios,
valuation models and reports into a sequence of events. The scenarios can
be used to perform ‘what-if’ analyses across a range of instruments and
currencies.

A scenario can also be built to model an institution’s end-of-day

procedures. This provides a secure but flexible mechanism to generate
daily reports. An end-of-day scenario can be modeled once and run every
day without requiring the system to shut down. Once created, the process
can be modified and expanded by users with the appropriate
authorization.

Scenarios are built using the graphical user interface, and can be run from
the graphical user interface or in a command line mode. The command
line interface, combined with the ability to save generated reports to the
Infinity database, provides the foundation for an institution to integrate
Infinity’s risk analysis system into its own customized risk management
system.

Using Scenario Builder

Once portfolios have been created and associated with the proper
valuation models in Trader’s main window, creating and running a
scenario is a straightforward process. Please refer to the Infinity Trader
Reference Guide for information on creating portfolios and valuation
models.

The general process is as follows:

[1] Select “New” from the Process menu.

Confidential — Infinity7.0 Scenario Builder Overview 87

 [2] Define a new process in the Scenario Definition window (as
shown on page 93).
[3] Give a name to your new scenario in the Process Name text field,
and select whether you want the scenario to be OPEN or
LOCKED in the Process Status text field.
[4] Save the process definition to the database with the Save
command in the Process menu.
[5] Confirm that the correct valuation date is entered in the Valuation
Date field.
[6] Left-click on the Run button. Your reports will be printed,
displayed, saved to the Infinity database, exported to a Lotus file
or any combination of these actions.

To run a pre-defined scenario, open the process with the Open command
in the Process menu. Then perform the steps [5] and [6] described above.

All the reports available in Trader are available in Scenario Builder:

• Cash Flow Projection

• Rate Reset
• Mark to Market
• Parallel Shift
• Custom Sensitivity
• Cross Sensitivity
• Sensitivity Volatility Points
• PDH
• DPH
• Option Exercise
• Option Greeks
• Greeks PV01
• EOD Fixing
• EOD Refixing
• Profit and Loss
• Profit and Loss Decomposition
• Accrual EOD
• Accrual EOD Refixing
• Accrual Profit and Loss

88 Scenario Builder Trade Guide to Risk Analysis

 Modes of Operation
Scenario Builder can operate in three different modes:

• with the full graphical user interface, including the process

control window
• with the graphical user interface, but without the process
control window
• with a command line text interface

GUI, with process In this mode, when a new scenario is initiated (i.e., when the Run button
control is pressed), the Scenario Progress Monitor window appears. This window
(see page 97) shows the state of the process currently being run, including
all associated warnings and error messages. The errors and messages are
displayed in a scrollable list box and are simultaneously written to an
error log. See the section on the Error Log on page 98 for further details.
The Progress Monitor also features a “Stop” button, allowing the user to
cancel the scenario mid-run.

To run this version of the application, simply type the full pathname of the
application executable (“scenario”) at the unix prompt, or run the
application from the InfTools application-launching utility.

GUI, no process Without the process control window, the only indication of a running
control process is the appearance of an hourglass-shaped cursor and the message
“Running Process: <risk_batch_name>” in the status window at the lower
left corner of the Main window. In place of the words “risk_batch_name,”
the name of your scenario will appear.

To run this version of the application, create a text file called

“useMonitor” that contains only the word “NO”. The word can be
lowercase, uppercase, or mixed. This file must be located in the same
directory as the “scenario” executable file.

Then, type the full pathname of the application executable (“scenario”) at

the unix prompt, or run the application from the InfTools application-
launching utility.

Command line This mode requires the user to supply the Process Name (the name of a
scenario already saved), a valuation date and login information. Before
being run in command line mode, the scenario must be defined using
Scenario Builder in its normal, graphical user interface mode. Each step
of the scenario definition must include the output instruction to
SAVE_TO_DB only.

When Scenario Builder is run in command line mode, the only output to
the screen is the risk_batch_run_id number of the scenario process
(printed to standard output). This number can be used as a key to retrieve

Confidential — Infinity7.0 Modes of Operation 89

 the risk reports which the process saves to the database. This number can
also be used to access the Error Log file, as explained on page 98.

To invoke Scenario Builder from the command line, type the command
“scenario” with the following arguments:

scenario <risk_batch_name> <valuation_date>

<risk_batch_name> is the name (case sensitive) of the previously

defined scenario. If the scenario name contains spaces, the name must be
enclosed in double quotes (“”).

The <valuation_date> must be entered in the format MM/DD/YYYY.

For example, to run the scenario “END OF DAY” for May 26, 1998, type:

scenario “END OF DAY” 5/26/1998

After you issue this command, the application will automatically search
for login information in a file called “infLogin.scenario” in Scenario
Builder’s executable directory.

To make an “infLogin.scenario” file, create a text file listing the server

name, database name, user name and password on separate lines, in the
application’s executable directory. For example, for user j_trader on
SERVER_1, database_4, with password “tintin,” the file would contain:

SERVER_1
database_4
j_trader
tintin

If the infLogin.scenario file does not exist, the standard Infinity login
dialog box will prompt you to enter the server name, database name, user
name and password.

90 Scenario Builder Trade Guide to Risk Analysis

 Scenario Builder’s Main Window
The Main window is the starting point of the application. From this
window, you can see the definition of your current scenario.

Scenario Builder Main window

Three text fields appear at the top of the window. The Process Name field
displays the name of the scenario, the Process Status field shows whether
the scenario definition is OPEN or LOCKED and the Valuation Date field
lists the date for which analyses will be performed.

The large table which makes up most of the window summarizes the
definition of the process that is currently open. Each row represents one
step in the scenario. In the sample scenario shown above, two different
analyses are run on the portfolio “RepTest”.

Run button Once the a scenario has been loaded or defined, use the Run button to
have Scenario Builder execute the scenario. Scenarios may also be run
using the Run command from the Process menu, described on page 95.

Error Log button Once the run of a scenario has been initiated, any errors are recorded in
the error log. For further details on this command and the error log, see
page 98.

Confidential — Infinity7.0 Scenario Builder’s Main Window 91

 Status Bar The two rows at the bottom of the window are referred to as the Status
Bar. The left section of the upper bar displays information on the status of
the scenario definition, such as whether it has been saved or modified.
The right section shows the name of the current user, database and server.
The lower row contains messages about the status of the application and,
once a scenario has been run, displays the name of the last process run
and the run_id number of that process.

Process Status: When a scenario is defined, it is given a security status of OPEN or

OPEN and LOCKED in the Process Status combo box (in the Scenario Definition
LOCKED window).

The Process Status

combo box

Scenarios saved with an OPEN status may be saved, modified, and

deleted by any user. The LOCKED status protects a scenario definition
from being changed or deleted by unauthorized users.

An administrator may create different user groups and assign different

security rights to each group. Certain groups of users may be given the
right to save their scenarios with a LOCKED status, and in most
installations, an even smaller group of users may receive the right to
change a scenario’s status from LOCKED to OPEN.

Contact your system administrator for information on your access

permission status. See the Infinity publication Infinity Access Permissions
and Trader Manager Reference Guide for more on setting up Infinity user
permissions.

92 Scenario Builder Trade Guide to Risk Analysis

 Defining and Modifying Scenarios
Process: New and Selecting the New or Modify command from the Process Menu brings up
Process: Modify the Scenario Definition window, allowing you to create or modify a
scenario.

The Scenario Definition window

Scenarios are defined in a step-by-step fashion. To define a step in a

scenario, use the list boxes in the Scenario Items area:

[1] Select a portfolio in the Portfolio list.

[2] Select a valuation model in the Model Association list.
You can click on the Define button to create a new valuation
model or click on the Modify button to update the selected
valuation model. The Valuation Environment Manager window is
displayed. Please refer to the Infinity Trader Reference Guide for
information on this window.
[3] Select a base currency in the Currency list. The currencies in your
trades will be converted to the base currency. If an FX rate is
missing, the system will return an error message. To input FX
rates, use the Utilities: Market Data: FX Rates command from
Trader’s main window.
[4] Select a base counterparty in the Base Counterparty list.
[5] Select a risk analysis in the Analyses list.

Confidential — Infinity7.0 Defining and Modifying Scenarios 93

 [6] Select a parameters’ template in the Analysis Input list when
needed. You can click on the Define button to create a new
template or click on the Modify button to update the selected
template. The corresponding risk analysis Template window is
displayed. Please refer to the corresponding risk analysis in
chapter 2, “Risk Analysis Reports”.
[7] Select a report type in the Report Type list.
[8] Select the output instructions in the Instructions list. Choose
whether to send the results of the analysis to the display screen
(Scenario Builder’s report windows are identical to those
produced by Trader, please refer to “Report Windows” on
page 11), the Infinity database, a printer, a file, a Lotus file or any
combination of these output types (please refer to “File
Commands in a Report Worksheet” on page 12 for further
details).
[9] Click on the Add button. The selected items are added to the
Scenario list.

You can add as many items as you want by repeating steps [1] through [9]
described above.

If you wish to run the Profit & Loss and the Profit & Loss Decomposition,
be sure to run an EOD Fixing before. If you wish to run the Accrual Profit
and Loss, make sure to run the Accrual EOD before.

When you run the EOD Fixing or the Accrual EOD, be sure to save it to
the database.

Outputs Sending the results to the display brings up the Process Progress Monitor
window, shown on page 97 (unless you are running the application
without the Process Progress Monitor) and displays the report in an
application window. Sending the results to the database saves the reports,
as well as each step of the scenario process, to the database which you are
currently logged into.

The application returns a unique risk_batch_run_id number to

identify the running of the scenario process. This number is shown in the
Status Bar of Scenario Builder’s main window once the process is run. If
Scenario Builder is being run from the command line without the
graphical user interface, the risk_batch_run_id number is returned to
the command line.

Reports produced by the scenario are saved to the ra_* series of tables.
The risk_batch_run_id number identifies the saved instances of the
risk_batch_run table.

If no SAVE_TO_DB instruction was included in the scenario definition,

there will be no entry in the database for the risk_batch_run_id.

94 Scenario Builder Trade Guide to Risk Analysis

 Clear button Each row in the Scenario list box represents a step in the scenario. To
clear the selections you have made in the Scenario Items area, use the
Clear button.

Saving a scenario Once you have defined the scenario, click on the OK button to return to
the Main window. Note that the scenario definition is not saved when you
dismiss the window. To save the scenario definition, use the Process: Save
command. To dismiss the window and cancel the changes you have made,
click on the Cancel button.

Remove, Modify, To remove an instruction set from the scenario, click to highlight that row
and Clear All in the Scenario list box at the bottom of the window and click on the
buttons Remove button. You may select multiple rows for deletion by holding
down the shift key while clicking on multiple rows.

Use the Modify button at the right of the Scenario Definition window to
change a step in your scenario definition. Highlight the row to be
modified in the Scenario list box. The items making up that step will
appear highlighted in the Scenario Items list boxes. Make the desired
modifications in the Scenario Items list boxes and click on the Modify
button. The selected row in the Scenario list box will reflect the changes
to that step.

The Clear All button clears the entire list of scenario steps you have
defined. If the scenario has not been saved, using this button will mean
that the scenario must be defined from scratch.

Process Menu Commands

Process: New The New command invokes the Scenario Definition window, discussed
on page 93.

Process: Open The Open command brings up the Load Scenario window.

Load Scenario window

Click on the name of the process you want to load. Then click on the Load
button to bring that set of instructions into the Main window.

Confidential — Infinity7.0 Process Menu Commands 95

 You can only open one scenario at a time. You could not, for example,
open two scenarios to combine the two instruction sets and then run both
sets of analyses at once.

Process: Modify The Modify command invokes the Scenario Definition window, discussed
on page 93. The list boxes show the definition of the currently open
scenario. If the scenario was saved with a security status of OPEN, you
can modify it.

Process: Save The Save command saves the scenario instruction set to the database. If
you have not already given a name to your scenario, a dialogue box
reminds you to do so before saving.

Only members of certain user security groups may save scenarios with a
security status of LOCKED. Consult your system administrator for
information on your security status.

Process: Delete The Delete command allows you to delete any scenario from the
database. It brings up the Delete Batch Process window.
Delete Scenario window

Click on the name of the scenario you wish to delete. Click on the Delete
button to delete the selected scenario. Only members authorized user
security groups may delete LOCKED scenarios. Again, consult your
system administrator for information on your security status.

Process: Run The Run command executes the process based on the Portfolios,
Valuation Models, Analyses, Parameters and Actions shown in the table
at the bottom of the Main window. This command can also be invoked by
clicking on the Run button.

Based on the output instructions defined for the scenario, Scenario

Builder sends the results of the analysis to the display screen, the Infinity
database, the printer, a file, a Lotus file or any combination of these
output types.

If you are running Scenario Builder with the full graphical user interface,
the Scenario Progress Monitor (see page 97) appears while the scenario is
running.

A note on performance: when multiple analyses are being run on a single

portfolio, that portfolio is only loaded once from the database. This
measure improves the application speed.

96 Scenario Builder Trade Guide to Risk Analysis

 Process: Exit The Exit command ends the current session of Scenario Builder. A
dialogue box will confirm that you wish to leave the application and if
you have not saved your scenario definition, the dialogue box will remind
you to save the definition.

Progress Monitor
The Scenario Progress Monitor reports information about a scenario
while it is running. It reports on the progress of the calculations and alerts
you to any errors encountered.

Progress Monitor window

When a process is running, Scenario Builder’s main window is not

accessible.

Stop button Clicking on the Stop button terminates the process currently being run.
Since the application must finish calculating the current step in the
scenario, a slight delay is normal before the process stops entirely.

Confidential — Infinity7.0 Progress Monitor 97

 Error Logs
If there are any errors, warnings or other status information produced
during the run of a scenario, an error log is produced. Each entry in the
log is prefaced with the date, user name, scenario name, run_id number,
portfolio name, valuation model, parameter group and analysis type.

The logs are written to the file error_log.<run_id> in the Scenario Error
directory. Designate the error directory using the Process: Preferences
command. If no directory is designated, Scenario Builder will save error
logs to the directory from which the application was launched.

Once error records have been written to the log, the Error Log button will
be enabled in Scenario Builder’s main window. Click on this button to see
the Error Log window. This window contains the error messages that
scrolled through the Scenario Progress Monitor window.

Error Log window

The File menu in the Error Log window has only one command: Print.
Invoking this command brings up the Print Utility window, shown on
page 12.

98 Scenario Builder Trade Guide to Risk Analysis

 Chapter 4

Risk Analytics

This chapter is an excerpt from the Infinity publication Infinity Financial

Analytics Glossary. For information about other analytics (such as
instrument pricing methods, interpolation methods or day count
conventions), refer to that publication.

This chapter includes sections on:

• Partial Differential Hedge

• Partial Differential Hedge — Multiple Use of Single
Instruments
• Hedge Recommendations — Futures Contracts
• Projected Flows
• Profit & Loss Decomposition

Partial Differential Hedge (PDH)

The PDH analysis calculates the sensitivity of a given portfolio to a user-
definable change in yield of a series of underlying instruments in a pricing
curve. The analysis also calculates a hedge recommendation in the
instruments used to build the curve.

Consider a zero curve Y which is constructed from a set of underlying

instruments, I1, . . ., In. This relationship can be presented as:

Y = y ( I 1, …, I n )

That is, Y is some function y of the instruments I1...n. For example, if this is
a Eurodollar curve, I1 may be the overnight rate, I2 the tomorrow night
rate, and so on. Y can be used to calculate the present value, PV, of a
portfolio, S, of swaps or other derivative securities:

PV = v ( S, Y )

Confidential — Infinity 7.0 Partial Differential Hedge (PDH) 99

 where v( ) indicates that PV is a function of S and Y. Since Y is a function
of the instruments, or the Ii’s, one can rewrite v as

PV = v ( S, I 1, …, I n )

To calculate a set of hedges in the instruments I1 through In, let PV0 be the
net present value of portfolio S using the current market quotes (prices or
yields) for the Ii’s. To calculate a hedge for I1, increase the yield on I1 by a
small amount and rebuild the yield curve Y. Using the new curve, revalue
S as:

PV 1 = v ( S, I 1 +, I 2, …, I n )

where I1+ indicates that the yield on I1 has been increased.

Let dPV(I1) represent the change in the present value of I1 resulting from
the small increase in the yield. To find a hedge position in I1, solve the
following equation for h1:

PV 1 – PV 0 + h 1 dPV ( I 1 ) = 0

– ( PV 1 – PV 0 )
h 1 = ----------------------------------
-
dPV ( I 1 )

PV1 - PV0 is the change in the value of the portfolio due to the small
change in I1. dPV(I1) is the change in the value of instrument I1 due to the
small change. The hedge, h1, is just that amount of I1 necessary to offset
PV1 - PV0.

To find a position h2 in I2, the steps are similar. Calculate PV2 as

PV 2 = v ( S, I 1, I 2 +, …, I n )

This gives a position in I2 of

– ( PV 2 – PV 0 )
h 2 = ----------------------------------
-
dPV ( I 2 )

In this same fashion, calculate hedges h3 through hn.

In the example above, the yields for the instruments were all increased by
a small amount. The hedges could also have been calculated by
decreasing the yields. Depending on S, the resulting hedges may be the
same or different. In the case of an at-the-money option near expiration,
the difference may be considerable. For this reason, there is the option of

100 Risk Analytics Trader Guide to Risk Analysis

 shifting Ii up and down to calculate an average hedge. In this case hi is
given by:

+ -
( PV i – PV i )
h i = -------------------------------------------------
+
( PV ( I i ) – PV - ( I i ) )

where PVi+ and PVi- represent the value of S with Ii shifted up and down.
Similarly, PV+(Ii) and PV+(Ii) represent the value of Ii with the quote
shifted up and down.

PDH — Multiple Use of Single Instruments

The partial differential hedge analysis is able to handle a variety of types
of curves used to value a portfolio. Dependent curves (those defined as a
function of two other curves) may present the problem in which an
instrument is shared between two or more curves.

For instance, suppose two curves, curve A and curve B, are used to
calculate the net present value of portfolio S. Curve A is defined by the
Curve Manager application as a dependent curve; that is, it is the sum of
two other curves, curve C plus curve D.

Curve C is a derived curve, generated from three instruments: I1, I2, and
I3. Curve D is a spread curve, added to curve C to simulate a swap.

Curve B is also a derived curve, generated from three instruments: I1, I2,
and I4.

In other words, the portfolio is priced using curves A and B:

CurveA = CurveC + CurveD

CurveC = f ( I 1, I 2, I 3 )

CurveB = f ( I 1, I 2, I 4 )

In this example, instruments I1 and I2 are both used twice in the

generation of the curves used to value portfolio S. This presents two
problems:

• if each occurrence of a shared instrument is shifted once, then

the hedge for the shared instrument would be overstated
• it is unknown which curve to use in calculating the dPV for
each of the shared instruments. To calculate the dPV for I1
and I2, should one use curve C or curve B?

Confidential — Infinity 7.0 PDH — Multiple Use of Single Instruments 101

 Before executing a PDH, Risk Manager inspects each curve and finds the
unique set of instruments used. In this example, Risk Manager would
create and operate on the set (I1, I2, I3, I4).

Each instrument in this set is shifted one at a time by the specified hedge
shift amount. After Risk Manager shifts an instrument and regenerates all
its associated curves, the present value of the shifted instrument is
calculated as an average. In this example, the present value of I1 would be
the average of the present values calculated for I1 with curve B and
curve C. Each instrument is only shifted once, and its PV is calculated as
an average.

Hedge Recommendations — Futures Contracts

When calculating recommended hedge values for futures, the resulting
floating point numbers are truncated into integers (representing whole
futures contracts).

At the end of the analysis, the sum of all the truncated decimal portions
may constitute several contracts. These contracts are redistributed among
the integral futures hedge recommendations as follows:

First, the number of futures contracts needed to be redistributed is

determined. As described above, this number is equal to the sum of all the
remaining decimal portions of the hedge recommendations. This sum is
truncated into an integer, with the fractional contract discarded.

Then, for each contract that needs to be distributed, Risk Manager finds
the hedge with the largest difference between the actual hedge value and
the truncated hedge value. The contract to be distributed is added to this
integral hedge recommendation.

This algorithm also functions where the extra contracts are negative
(when the hedge recommendations themselves are negative numbers).

102 Risk Analytics Trader Guide to Risk Analysis

 Projected Flows
The cash flow projection report assigns cash flows to user definable time
buckets using the forecast method. Cash flows can be assigned to time
buckets based on their calculation date or payment date.

For both swaps and FRAs, flows are forecasted using the appropriate
forecasting curves and then assigned to the corresponding time buckets.
Known and forecasted flows are distinguished in the report. As an
example, consider a simple two-period swap where the receiver gets an
index (r) minus a spread (s). The first flow is set in advance and the
second flow is projected:

t1 = known flow = ( r – s ) ⋅  ---------  ⋅ P

90
 360 

t2 = estimated rate portion minus the known spread portion

known portion of flow2 = s ⋅  ---------  ⋅ P

90
 360 

estimated portion of flow2 = w ⋅  ---------  ⋅ P

90
 360 

w is the forward rate calculated from the forecasting curve. The actual
report in Risk Manager displays the principal and term of the estimated
flows, in addition to the flows themselves.

Confidential — Infinity 7.0 Projected Flows 103

 Profit and Loss Decomposition
The purpose of this section is to explain in detail the calculations
performed in the P&L Decomposition report for the different
decomposition orders.

Option 1: Time, Reset, Closing price, Curve, Vol, FX

• Time
The time component measures the change in value of a
portfolio due to passage of time while keeping other
components constant. This component is calculated by the
difference in MTM of the portfolio on the analysis begin date
and MTM on the end date with the market data moved
forward. Note that to offset the change in MTM value due to
today’s cash payments, the cash amount should be added to
MTM on the end date. Any reset occurring on the end date
should be ignored when calculating MTM on the end date.
This is done by setting setIgnoreResetDays to 1 in
InfFlowCollection in each security containing flows.
Let T’ be MTM on the analysis begin date using curves and
FX rates current on the analysis begin date.
Let T be MTM on the analysis end date using curves and FX
rates moved forward from the analysis begin date to the end
date and ignore resets on the end date (ignoreResetDays = 1).
P&L(time) = T - T’
• Reset
The reset component measures the change in value of a
portfolio due to rate resetting on the valuation date. This
component is calculated by the difference in MTM on the
analysis end date using moved forward market data and
ignoring resets and MTM using the same market data but
including resets. Including resets in MTM is done by
resetting ignoreResetDays to 0 and revaluing the portfolio.
Amounts are converted to base currency using FX rates on
the analysis begin date.
Let R be MTM on the analysis end date using the moved
forward market data and including resets (ignoreResetDays =
0).
P&L(reset) = R - T
• Price
The closing price component measures the effect from
movement in bonds and futures closing prices. This
component only includes trades that uses closing prices in
valuation directly such as bonds, futures and bond options.
Let P be MTM on the analysis end date using moved forward
interest and volatility curves and current bond and futures
closing prices.
P&L(closing price) = P - R

104 Risk Analytics Trader Guide to Risk Analysis

 • Curve
The curve component measures the effect from movements in
interest rate curves.
Let C be MTM on the analysis end date using current interest
curves current and moved forward volatility curves.
P&L(int) = C - P
• Vol
The vol component measures the effect from movements in
interest rate volatilities assuming interest rate levels and
volatilities are independent.
Let V be MTM on the analysis end date using interest rate
curves and volatility curves current on the end date.
P&L(vol) = V - C
• FX
The FX component measures the effect from movements in
FX rates.
Let FX be MTM on the analysis end date using interest rate
curves, volatility curves and spot FX rates current on the
analysis end date.
P&L(FX) = FX - V
Option 2: Time, Reset, Closing price, Vol, Curve, FX

This option has the same decomposition components as option 1; only the
order of decomposition for curve and vol is reversed. Volatility curves and
surfaces are applied before interest curves.

• Vol
Let V be MTM using vol curves current on the analysis end
date and moved forward interest curves.
P&L(vol) = V - P
• Curve
The curve component is calculated by applying interest curve
movements on top of volatility changes.
Let C be MTM on the analysis end date using vol curves and
interest curves current on the analysis end date.
P&L(int) = C - V
• FX
Calculation of P&L from FX movements is identical to
option 1.
Option 3: Time, Reset, Closing price, Curve, Spread, Vol

For interest curves of the same currency, a user might want to represent
them as spreads of a selected base curve in that currency. By doing so, the
base curve and the spread curves rather than the actual curves are the
decomposition components.

The spread component is further decomposed into subcomponents of

individual spread curves.

Confidential — Infinity 7.0 Profit and Loss Decomposition 105

 The spread subcomponents are applied on top of each other and the order
in which they are applied is arbitrary chosen to be by alphabetical order of
the curve currency and index name.

Using the example above and assuming the portfolio uses a CAD Prime
curve in addition to the LIBOR and CP curves, if LIBOR is chosen as the
base curve, the CP and Prime curves will be represented as spread curves
on top of the LIBOR curve. The curve component will capture the LIBOR
curve and the Prime and BA spreads will be captured by two spread
subcomponents. Calculation for the component P&L are similar to option
1 and 2. The time and reset component calculations is identical to option 1
and 2.

• Curve
Let C be MTM on the analysis end date using interest curves
current on the end date and moved forward CAD CP and BA
spreads.
P&L(int) = C - P
• Spread
Let S-cad.cp be MTM on the analysis end date using CAD
LIBOR curve and CAD CP spread current on the end date,
moved forward CAD Prime spread and moved forward USD
curves.
Let S-cad.prime be MTM on the analysis end date using
CAD LIBOR curve and CAD CP and Prime spread current
on the end date and moved forward USD curves.
P&L(CAD-ba) = S-cad.ba - C
P&L(CAD-cp) = S-cad.cp - S-cad.ba

Calculations of P&L from changes in volatility and FX rates is identical

to option 1. Volatility changes are applied on top of changes on interest
curves and spreads and FX changes are applied on top of volatility
changes.

Option 4: Time, Reset, Closing price, Vol, Curve, Spread

This option has the same decomposition components as option 3; only the
order of decomposition for curve/spread and vol is reversed. Volatility
curves and surfaces changes are applied before interest curves, spreads
and FX rates. The vol component is calculated by moving volatility
surfaces and curves after the reset component is calculated.

106 Risk Analytics Trader Guide to Risk Analysis

A C
Accrual EOD fixing process 77 Cash account adjustment window 64
deleting accrual EOD values 81 Cash accounts 60
fixing cleanup window 81 Cash flow projection report 30
fixing flags window 81 calculations 103
report results 79 report results 32
report type 78 report type 31
saving the report 81 setting the specific parameters 31
setting the accrual period 78 time buckets 30
setting the base currency 78 Creating a new template 16
setting the portfolio 77 Cross sensitivity report 27
setting the valuation date 77 report results 29
setting the valuation model 78 report type 28
Accrual EOD refixing process 82 setting the shifts 28
report results 83 Curve index 21
report type 83 Custom sensitivity report 23
setting the accrual period 78 report results 25
setting the base currency 82 report type 24
setting the portfolio 82 setting the custom curves 24
setting the valuation date 82
setting the valuation model 83
Accrual profit & loss report 84 D
report results 85 Database server 5
report type 84 Defining scenarios 93
setting the accrual period 78 Deleting accrual EOD values 81
setting the portfolio 84 Deleting EOD values 64
setting the valuation date 84 Delta 50, 53
setting the valuation model 85 Direct perturbation hedge report 34
Accrual profit and loss reports 76 Displaying the report 16
accrual EOD fixing process 77 dNPV 20
accrual EOD refixing process 82 DPH report 34
accrual profit & loss report 84 calculation overview 35
earned interest 77 forward bucket perturbation 36
overview 76 hedge parameters 37
realized cash 76 hedge portfolio window 39
unearned interest 77 hedge vehicles 35
Address of Infinity 7 methodology overview 34
Adjusting the cash accounts 64 overview 34
performing the DPH report 36
perturbation set window 41
B principal component perturbation 36
Base currency 15 principal component perturbation window 40
Base curve assignment window 75 report results 38
Batch definition 93 report type 36
Batch error logs 98
Batch outputs 94
Batch progress monitor 97

Index page 107

E H
Earned interest 77 Hedge portfolio window 39
EOD fixing process 61 Hedge recommendations 102
adjusting the cash accounts 64 Hedge vehicles 35
deleting EOD values 64
fixing cleanup window 64
fixing flags window 63 I
report results 62 Incorrect login 6
report type 62 Infinity address 7
saving the report 63 Infinity technical support 6
setting the base currency 61
setting the portfolio 61
setting the valuation date 61
setting the valuation model 62
L
EOD refixing process 65 Logging into Scenario Builder 5
report results 66 Logging into Trader 5
report type 66 Login window 5
setting the base currency 65 Lotus output 14
setting the portfolio 65
setting the valuation date 65
setting the valuation model 66 M
Error logs 98 Mark to market report 17
Est 01 56 report results 17
report type 17
Move curves forward 54, 74
F
Fields 75
File commands 12 N
Fixing cleanup window 64, 81 New features 3
Fixing flags window 63, 81 New template 16
Forward bucket perturbation 36
Futures contracts recommendation 102
O
Option exercise report 47
G report results 48
Gamma 50 report type 48
Generating reports 9 setting the specific parameters 48
Greek values 50, 53 time buckets 47
Greeks PV01 report 53 Option greeks report 50
move curves forward 54 report results 51
report results 55 report type 50
report type 53 setting the greek values 50
setting the specific parameters 54

P
P&L analysis period 68

page 108 Index

Parallel shift report 20 Projected cash flows calculations 103
report results 21
report type
curve index 21 R
specific curve 21
Rate reset report 56
setting the parallel shift 21 est 01 56
Partial differential hedge report 44 report results 58
Password 5 report type 57
PDH analytics 99 setting the specific parameters 58
PDH calculations 99 time buckets 57
PDH hedge recommendations 102 Realized cash 76
PDH multiple use of single instruments 101 Release notes 3
PDH report 44 Report tables 11
overview 44 Report type 16
performing the PDH report 44 Report window 12
report results 46 Report windows 11
report type 45 Reports
setting the shifts 45 accrual EOD fixing process 77
setting the valuation model 45 accrual EOD refixing process 82
Performing the report 16 accrual profit & loss 84
Perturbation set window 41 cash flow projection 30
Principal component perturbation 36 cross sensitivity 27
Principal component perturbation window 40 custom sensitivity 23
Print 12 DPH 34
Print to file 14 EOD fixing process 61
Print to Lotus 14 EOD refixing process 65
Profit & loss report 67 general tab 15
report results 69 creating a new template 16
report type 68 displaying the report 16
setting the P&L analysis period 68 performing the report 16
setting the portfolio 67
setting the base currency 15
setting the valuation date 67
setting the report type 16
setting the valuation model 68
setting the specific parameters 16
Profit and loss decomposition report 72
base curve assignment window 75 setting the transaction set 15
calculations 104 setting the valuation date 15
move curves forward 74 setting the valuation model 16
overview 72 Greeks PV01 53
performing the report 73 mark to market 17
report results 75 option exercise 47
report type 73 option greeks 50
setting the specific parameters 74 parallel shift 20
Profit and loss reports 60 PDH 44
cash accounts 60 profit & loss 67
EOD fixing process 61 profit and loss decomposition 72
EOD refixing process 65 rate reset 56
profit & loss report 67 sensitivity volatility points 25
Progress monitor 97 Reports principles 9

Index page 109

Risk analytics 99 Setting the transaction set 15
Setting the valuation date 15
Setting the valuation model 16, 45
S Specific curve 21
Specific parameters 16
Save to database 12
Saving the Accrual EOD fixing process 81
Saving the EOD fixing process 63
Scenario Builder T
command line 89 Tables 11
defining scenarios 93 Technical support 6
error logs 98 Theta 50, 53
main window 91 Time buckets 30, 47, 57
modes of operation 89 Time, reset, closing price, curve, spread, vol 105
no process control 89 Time, reset, closing price, curve, vol, FX 104
outputs 94 Time, reset, closing price, vol, curve, FX 105
overview 87 Time, reset, closing price, vol, curve, spread 106
process control 89 Transaction set 15
progress monitor 97
Sensitivity
cross sensitivity report 27 U
custom sensitivity report 23
parallel shift report 20 Unearned interest 77
sensitivity volatility points report 25 User name 5
Sensitivity of PV01 53 Using Scenario Builder 87
Sensitivity reports 20
Sensitivity volatility points report 25
report type 26 V
setting the shifts 26 Valuation date 15
simple volatility surfaces 25 Valuation model 16, 45
tenor spread volatility surfaces 25 Vega 50, 53
volatility curves 25 Version 7.0 3
Setting the base currency 15 Version number 6
Setting the report type 16
Setting the specific parameters 16

page 110 Index