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Consulting Services

1. Valuation of structured FX and interest rate products

2. Benchmarking and Stress Testing of Asset Portfolios

3. Risk advisory for liability portfolios

4. Credit Exposure Analysis

Valuation of structured FX and interest rate products

Medcaps have the market experience and analytic expertise to value complex trades in the foreign exchange and interest rate markets as well as cross-market deals for which liquidity/pricing information is not readily available. 

Beyond first generation exotics, Medcaps are able to value and provide risk analysis for most second and later generation products. These include, for interest rates, the entire range of callable Libor exotics (range accruals, inverse floaters, quanto-ed deals), highly structured liability management trades (quanto-ed baskets, leveraged performance) and cross-asset hedging (interest rates linked to credit/commodity/equity). For FX these include forward start, ratchet and installment options with their quanto variations. 

Using a mix of analytical, lattice and Monte Carlo simulation tools, Medcaps help clients value structured trades and identify/stress-test the principal risks. Medcaps have helped clients with periodic revaluations of their derivatives and structured products portfolios and measuring their potential future exposure (PFE) under adverse market scenarios. 

Medcaps have developed advanced simulation methods for scenario generation across most asset classes which enable us to analyze portfolio performance in "unlikely" business environments and assign probabilities to those environments. The simulation generator is initialized and calibrated to both past data and forecasts implied in current market data. In addition, Medcaps allow the user to design possible future market scenarios to compare model performance with the house-view.

Medcaps place great emphasis on the appropriate calibration and initialization of our simulation generators. For analyzing risk Medcaps perform extensive diagnostics on historical yield curves, FX rates, credit spreads, volatility structures etc. The diagnostics help to "police" the simulated rate paths and bring coherence between the historically calibrated and current market calibrated parts of the engine. A significant amount of back-testing is performed (i.e. what scenarios generate a particular P/L or risk outcome) to ensure model consistency.

Benchmarking and Stress Testing of Asset Portfolios

Asset portfolios with significant amount of non-linearity due to presence of structured products, embedded options etc have a fair amount of second (and higher) order risk which needs to be dimensioned. Even linear vanilla portfolios can have substantial tail risk due to non-normality and "fat-tailed"-ness of asset price distributions. Our proprietary simulation models capture non-linearity and non-normality explicitly. Using Extreme Value Theory, Medcaps are able to embed explicit tail distributions calibrated to historical and market data into our simulation models.

Asset portfolios can be benchmarked to a choice of curves in different currencies (e.g. US Treasuries, Sterling swaps, Euro-zone government debt). Portfolios are revalued on the benchmark and subject to various diagnostics like curve/volatility/correlation shifts as well as changes in reinvestment assumptions (tenor/credit mix, fixed-floating composition etc).  A stochastic simulation is then performed which identifies the "best" and "worst" case scenarios of the portfolio. This, apart from providing a "heath-check" on the portfolio, can also be used to evaluate new strategies/investments. For example, when considering a yield-enhancement strategy, the user can see how much incremental risk is being taken on for a given enhancement. The scenario analyses can help define investment allocation parameters: for example, setting sensitivity limits global limits for the best/worst scenarios. This enables "risky" trades to be appropriately dimensioned.

Risk advisory for liability portfolios

Medcaps provide liability management tools and advice to banks and mid-sized corporations. Our simulation-based tools help our clients identify their risk financial exposures and our structured products advisory enables them to tailor their risk profile in line with management policy. Sitting on top of the simulation tool is our capital model which helps corporations decide on their optimal capital structure and cost of capital. Our expertise in corporate risk advisory has helped clients choose judiciously from the many strategies presented to them by their bankers, restructure and reposition their portfolios when appropriate and see the capital structure implications of their funding and hedging decisions. 

Credit Exposure Analysis

Medcaps have extensive experience consulting on the effectiveness of credit exposure management policies and procedures for banks, insurance companies and corporations. This involves setting up an efficient framework for the definition and quantification of credit risk imbedded in asset and liability products, their measurement and monitoring at a product portfolio or counter-party level and their mitigation through reserving and use of synthetic credit products (single and portfolio credit default swaps, CDOs etc). Implications for capital adequacy, regulatory and accounting treatment are also addressed. Medcaps have helped clients improve and enhance their internal credit monitoring systems, introduced methodologies for measuring complex derivative credit risk and calculating credit add-ons.