Derivatives Analytics Overview

Prashanth Kuttuva,Executive Director

E &Y

Derivatives Analytics Presented by: Prashanth Kuttuva,

Executive Director, Ernst and Young – Global Talent Hub

2016 SPRING INFORMATION EXCELLENCE SUMMIT

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Analytics - at Financial Institutions

Broad Subject:

- Marketing Analytics

- Retail Banking Analytics

- Operational Risk

- HR Analytics

- Insurance Analytics

- Banking Book Analytics

- etc………

- Trading Book Analytics – High quality data

Securities - Corporate Bonds, Equity, Sovereign Bonds

Financial Derivatives - Forwards, Futures, Swaps, Options

Securitized Products - Asset Backed Securities (Credit Card, Mortgages)

Common Issue: Quality of the Data

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Derivatives Risk Measurement – Process Flow

Risk and Sensitivity

Measures Valuation

Bootstrapping

(Data Processing) Market Data OTC

NYSE

HKSE

BSE

NSEI

NASDAQ

LSE

50% 50%

Learning Scale

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Derivatives - Asset Classes “ Derivatives is a financial product derived from another product” Asset classes

Foreign Exchange

Commodity

Interest Rate or Fixed Income

Credit derivatives

Equities/Index

Derivatives Analytics

We get more reliable data, so less assumption

Advanced analytics is used

MOST IMPORTANTLY – 20+ Major countries

- 5000+ traded instruments for just Interest rate market

- 5000+ traded credit spread for Credit derivatives market

- ……. Variety of commodities, Equites traded

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Deep Dive – USD Interest Rate Market

Presented below is the deep dive of Interest Rate Data for the USD

Market with LIBOR underlying.

USD Interest Rate Market Available Tenors in market

Cash rates (LIBOR, BB, BA) Overnight to one year

Futures (LIBOR) 1 months to 2 years

FRA (LIBOR) 3 months to 2 years

Swap rates (LIBOR) 2 years to 30 years

Tenor basis spreads (LIBOR) 1 year to 30 years

Cap volatility ATM and Skew Vol from 1 year to 10 years

Swaption volatility ATM and Skew Vol from 1 year to 30 years

OIS (Fed Funds) Overnight to 30 years

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USD 5Y Swap Rate - Convention

Interest Rate Curve - USD

Detailed below is the convention of a 5Y Interest rate swap.

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Convention is the key

The models and the system should read the convention and the data

correctly. If the system fails to read the data accurately there may be a

huge valuation error.

Example: Correct Convention Incorrect Convention

Notional $ 100,000,000 $ 100,000,000

10Y Swap Rate 5.00% 5.00%

Day Count Convention 30/360 Act/360

Interest for 10 years $ 50,625,000 $ 51,328,125

Difference in interest $703,125

Example: Correct Convention Incorrect Convention

10Y Swap Rate 5.00% 5.00%

Compounding Convention Semi-Annual Monthly

Interest for 10 years $ 50,625,000 $ 51,161,898

Difference in interest $536,898

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This publication contains information in summary form and is therefore

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14 September 2015 Derivatives Analytics Overview

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