Here is the associated technical article published in the Nikkei Financial Daily about Aprecia
There are standard approach and internal model approach according to market risk measurement of BIS 2 regulation. But there are problems using both of them.It is unweighted to shift standard instumentation to internal model approach as an realistic reciprocation.Hatori Marshall Co.Ltd developed bucketing approach management system according to actual sensitivity measurement which can measure swap market risk efficiently.
It is necessary to reconfigure organizaition along with considerable system investor in order to meet both qualitative and quantitative criteria if accurate risk management is practiced and internal model sholuld be adopted as what the large financial institutions is doing.On the other hand, adoption of standard instumental approach from the view of convenience is barkward from the view of competitie conservation. The most realistic answer is that at first take standard instrumental approach facing BIS2 regulation and then sequencially shift from risk category to internal model after necessory know-how is builtup and systemacllyadapted in situation that both approaches are accompanied by risk.
|fomular 1 ]|
2.Acalculation of NPV and the interpolation of DF
DFn at 5th Oct can be got by interpolation of DF1 and DF2,PV of the CFn can be caculated by formular 2.
3.Bcalculation of sensitivity
As CFn is between the grid point of 28th Aug and 28th Dec, PV is effected by the change of interest rates and that can be comprehended by intuition.We call the the PV's movement caused by interest rate interest sensitivity.
Interest rate rises to 3.1% if 1 month interest is increased by 10 basis point and DF of Aug 28th will change.Of course PV of CFn will change to what formular 3 is like because of the movement of DFn. In other words, interest sensitivity comes as in formular 4 with the 10bp increase of 1month interest rate. With the same procedure -128.34835947 yen is the interest sensitivity against 10bp increase of 5months interest rate.
[ formula 4]
4.decompsition of cash flows
The attibute of CFn is described by Pic 5 from the calculation result of step1 to step 2.
|[ formula 5]|
reciprocation to market transactions
Consider CFn=CF1+CF2 on condition that it caters to the two attributes of formular 5 even if CFn is broken into CF1 or CF2.CFn has a sensitivity to the particular grid point because the decomposed cahsFlow such as CF1 & CF2 locate on the grid point although CFn has 2 proportional sensitivities to the movement of 1month rate and 5 month rate as CFn is between Aug 28th grid point and Dec.28th grid point CFn.
So, it comes with formula.
|[ formula 6]|
From the above we conclude that CFn can be distributed to CF1 and CF2. CF1= 688,524.59 Yen
CF2 = 311,475.41
Then equity captital can be worked out by inputting bucketed cashflow as PV of zero-coupon bont into ladder, the standard instrumental approach.
Hatori Marshall call the procedrue from step1 to step2 bucketing under measured sensitivity. Regular periods are chozen with transactons processed in the market although the decision of the grid point depends on users.
Hatori Marshall developed Apprecia, a risk management system collaborated with COSMAC CO.LTD, taking this approach of measuring sensitivity with the consideration of system performance and developing cost.
It takes enormors time to conduct term-proportion bucketing because swap portfolio are registered by large amount of trades and there can be hundreds of thousand of orders.
Apreccia configure out DF as functions of yield curve and take the specification that DF interlock the shift of grid point on the curve,achiving a high performance of bucketing according to measuring sensitivity, and the easy expansion on option's gamma risk instrument program with little modificatoin .
Reality beyond text
Although BIS2 tends to focus attention on VAR ,there are lots of problems which should be solved such as instability of correlation matrix in matrix method or abnormal distribution of historical valotility.It is easy for everyone to develop a program ignoring those problems and only carrying out VAR measurement according text, but the significant VAR instrument can not be achieved.
It is a realistic choose by construction with sophistic approach within the frame of standard instrument before the accomplishment of quantitative VAR instrument on target.