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Derivatives  Valuation

Overview

Medcaps offers FX and interest rate derivatives valuation services to its corporate and institutional customers. The service includes bespoke standalone valuation models with rate-feeds as well as periodic portfolio valuations. Our objective is to equip end-users with easy-to-use templates to value sophisticated products accurately and obtain a measure of the risks and the potential future exposure inherent in these products. Our valuation solutions are best suited for corporate treasuries and derivatives marketing desks in banks and asset management companies. 

The service

The offering is usually packaged with our liability management tool MARS and/or asset management tool IPSA. It enables our customers to independently  value and risk-manage their derivatives strategies and check the pricing shown by their bankers.  The service consists of: 

Ø Valuation and exposure management tools specifically designed for the trades and strategies the customer has in mind. Our risk managers install the software on our clients' PCs and guide them through the use. 

Ø Rate updates at the click of a mouse: downloads the RateSheet appropriate for the trades from the Medcaps website. The RateSheet is updated periodically with the latest market prices and volatilities. The correlation/skew structure and other relatively invariant parameters are updated bi-weekly. 

Ø The sensitivities/potential exposure results are generated in HTML which can be easily distributed for discussion via the corporate intranet.

Ø Quick turn-around on template fine-tuning: the modified template is usually installed within one working day.

Ø Optional database functionality to facilitate periodic portfolio revaluations. 

Ø In addition, we provide a periodic (weekly/monthly) revaluation service for our customers' derivatives portfolio. Apart from mid-market valuations (NPV), we also deliver the potential future exposure (PFE) at an agreed percentile for individual trades and cut by counterparty or portfolio to incorporate netting/early termination and other contractual features. 

Model overview

Inputs

• The deal details - see sample template below
• Rates, volatilities, correlations etc
• Exposure calculation parameters (add-ons etc)
• Spreads: bid-offers, credit charge etc 

Valuation engine

• VB/C++ Template or Excel as desired by the user 
• Routines written in C++ for optimal performance and compiled in product libraries.
• DLL/XLL wrappers for Excel implementations

Simulations for Valuation and Exposure Calculations

• Optimized using quasi-random number sequences
• Holistic framework (Libor Market Model) for valuing all path-dependent/American exercise products
• Stochastic volatility LMM implementation of all callable Libor exotics
• Stochastic volatility with jumps as modeling framework for FX exotics (based on Heston '93). 

Outputs

• NPV, delta and vega for interest rates and, in addition, volga and vanna for FX.
• PFE profile at the desired percentile
• All valuation drivers: forward rates, volatilities, correlations 

Follow the links for model screenshots 

Leveraged Knock-out Quanto Swap Input/Output 

Single Barrier FX Option Input/Output 

Callable Range Accrual Excel Implementation

Vanilla FX Option: basic greeks HTML output

PDFs

Derivatives 101

FX Products 101