Valuations

We implemented an engine for pricing highly structured investment products in the fixed income class. These products had hybrid features, such as inflation, FX and credit, which added to the complexity. In a later project phase, the team extended the Open Source Risk Engine (ORE) to cover the asset manager’s entire derivatives portfolio, which further reduced the cost of external pricing services.

Our client was approached by a large group of dealer counterparties seeking to restructure old-style CSA agreements. The client had a large outstanding variation margin (double-digit billion EUR) and wanted to realize the value mainly contained in the collateral interest floors of its CSAs. Our team were engaged to calculate the value of the “in-the-money” features of the client’s CSAs and hence verify independently that the compensation offered by counterparties was fair. The portfolios totalled several thousand Swaps, FX Swaps, Bermudan Swaptions, Inflation Swaps, BMA Swaps, CDS, and other types of structured products. Based on our valuations, the client was able to realise a triple digit million Euro amount in compensation across all portfolios.

In the context of its CSA renegotiation, the client engaged us for the implementation of a CSA valuation tool that priced the value of its CSA’s features under renegotiation, mainly the collateral interest rate floors. We implemented its Open Source Risk Engine (ORE) into the client's IT infrastructure, building the trade and market data interfaces from the front office systems. Based on the ORE calculations, the client successfully renegotiated the affected CSAs. The client subsequently introduced ORE+ as a forecasting tool for variation margin to support its daily liquidity management process.