IR Risk Category Group

1. CapeTools IR Risk

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   General Description

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   Functions to compute detailed interest rate risk analysis on a portfolio of deal types.
   All of these reports take a Structure object which is created via the CreateStructure function.
   A structure object can contain object deals created from the following categories of functions :
   
   

   • CapeTools FIXED Legs
   • CapeTools FLOAT Legs
   • CapeTools Compounding FLOAT Legs
   • CapeTools Averaging FLOAT Legs
   • CapeTools ZeroCoupon FLOAT Legs
   • CapeTools FIXED + FLOAT Legs
   • CapeTools FIXED + AVERAGE FLOAT Legs
   • CapeTools FIXED + COMPOUNDING FLOAT Legs
   • CapeTools Exotic Legs
   • CapeTools Bonds
   • CapeTools Bonds (Yield)
   • CapeTools Bonds (Price)
   • CapeTools Forward Bonds
   • CapeTools Bond Options
   • CapeTools Municipal Bonds
   • CapeTools Bond Portfolio
   • CapeTools Swap Portfolio
   • CapeTools Basis Swap Portfolio
   • CapeTools XCcy Swap Portfolio
   • CapeTools CDS Swap Portfolio
   • CapeTools CapFloor Portfolio
   • CapeTools Swaption Portfolio
   • CapeTools Leg Portfolio
   • CapeTools Basis Swap Portfolio

   
   
   The following types of YieldCurve risk reports can be constructed :
   
   

   • CreateDeltaReport
   • CreateGammaReport

   
   
   The Gamma report contains all the information that the Delta report does.
   
   
   YieldCurve risk is conducted by first identifying the points within the yieldcurve that all the deals within the structure object are sensitive to.
   
   Then these points are bumped and all the deals repriced. Delta and/or Gamma risk is then computed and stored. Functions within the CapeTools Query IR Risk category of functions are then used to display the generated risk number for either all deals or a user-defined criteria.
   
   
   The following types of VolCurve risk reports can be constructed :
   
   

   • CreateVegaReport
   • CreateVolgaReport
   • CreateSABRReport

   
   
   The Volga report contains all the information that the Vega report does.
   
   
   VolCurve risk is conducted by first identifying the points within the VolCurve that all the deals within the structure object are sensitive to.
   
   Then these points are bumped and all the deals repriced. Vega and/or Volga (second derivative) risk is then computed and stored. Functions within the CapeTools Query IR Risk category of functions are then used to display the generated risk number for either all deals or a user-defined criteria.
   
   
   These risk reports can be expensive (in time) especially for large portfolios and so the following functions can be used to read/write the internal state of any of the 5 risk reports above to a file.
   
   
   

   • ReadYCRiskReport - for YieldCurve risk reports.
   • ReadVCRiskReport - for VolCurve risk reports.
   • SaveYCRiskReport - for YieldCurve risk reports.
   • SaveVCRiskReport - for VolCurve risk reports.

   
   
   These functions are useful for archiving risk reports or to quickly read a risk report in and then apply the same risk analysis one would normally do using the functions present within the CapeTools Query IR Risk category of functions.
   
   
   The CreateSABRReport() is an very useful report as you can specify any of the three SABR parameters ('ALPHA', 'BETA' and 'RHO').
   If the underlying VolCurve that is passed to the VegaRiskReport or VolgaRiskReport is a SABRVolCurve object that you will have realistic movement within the interest rate volatility smile than that of using the ExpiryKVolMatrix or ATMVolMatrix VolCurve objects. Normally when the At-The-Money volatility is bumped by 0.01, for example, the volatility smile does not move by 0.01 at all points. Traditional methods of bumping each point by 0.01 do not give a realistic movement of the volatility smile. The SABRVolCurve object captures this dynamic movement.
   
   
   
   
   
2. CapeTools Query IR Risk

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   General Description

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   Functions to query risk reports produced by functions within the CapeTools IR Risk category of functions. There are four types of query functions within this category of functions.
   
   The first are functions to query the report itself (Report functions). The types of legs, the list of legs and if one were to execute the QueryVCRiskReport() and QueryVCRiskReport() functions, which legs will be selected for the report.
   
   The second category of functions are those that go out and actually produce the risk numbers (Query functions). These functions employ a kind of database SQL method in order to retrieve and aggregate the interest rate reports.
   
   The third type of functions are those that act upon the YieldCurve or VolCurve that are to be manipulated (Curve functions). These functions simply returns a sensitivity curve/matrix of the instruments underlying the curves.
   
   Finally the fourth type of functions are those that do not act upon the report itself, but rather the structure object (Structure functions). These functions simply report which legs within the structure object are sensitive to which curves (Yieldcurve or/and VolCurves).
   
   
   Report functions are functions that help in determining the types of legs, leg types that are present within the report.
   
   
   The following (Structure) functions provide a type of heat-map of the points that are to be manipulated during the construction of a riskreport (functions wihin the CapeTools IR Risk category of functions) :
   
   

   • RiskGetYCSenPoints - for YieldCurve risk reports.
   • RiskGetVCSenPoints - for VolCurve risk reports.

   
   
   Basically these functions take your structure object (generated via the CreateStructure() function) and the curve that is to be bumped and counts how many times each point within the curve (YieldCurve or VolCurve) are accessed. Thus you can see the points on the curve that have the largest concentration of activity given a structure.
   
   The following (Structure) functions will display the list of legs within a structure object that are sensitive to the given curve (YieldCurve or VolCurve) :
   
   

   • RiskGetVCSenLegs - for VolCurve risk reports.
   • RiskGetYCSenLegs - for YieldCurve risk reports.
   • RiskGetYCVCSenLegs

   
   
   The RiskGetYCVCSenLegs() function is quite interesting as it will return the list of legs that are sensitive to both the given VolCurve and YieldCurve.
   
   The following (Curve) functions will display the sensitivity curve (in the case of a YieldCurve) or sensitivity matrix (in the case of a VolCurve) of the instruments underlying the curve. Thus for the 10Y Tenor within the YieldCurve, this will be the sensitivity (delta) of the 10 year swap rate from spot. For the 5Y into 10Y Volatility point on a SABR VolCurve, this will be the sensitivity (vega) of an At-The-Money 5Y into 10Y Swaption instrument :
   
   

   • DisplayYCHedgeSens2 - for YieldCurve risk reports.
   • DisplayVCHedgeSens2 - for VolCurve risk reports.
   • DisplayVCHedgeSens3 - for VolCurve risk reports.

   
   
   The risk reports also store these sensitivity values and they can be extracted via the following functions (given a report object) :
   
   

   • DisplayYCHedgeSens - for YieldCurve risk reports.
   • DisplayVCHedgeSens - for VolCurve risk reports.

   
   
   These value are needed in order to output different risk report numbers (notional of the hedge instrument for example.)
   The following (Report) functions list the leg names that are stored within the report :
   
   

   • ListVCRiskLegs - for VolCurve risk reports.
   • ListYCRiskLegs - for YieldCurve risk reports.

   
   
   These legs should correspond to the list of legs passed to the CreateStructure() function.
   Each leg within a report is assigned a leg type. For example all legs created via functions contained within the 'CapeTools FLOAT Legs' category of functions are given a type of 'FLOAT'. When querying the risk reports you can supply a list of leg names, leg types or both.
   
   Thus it is important to remember that a Leg-Name is an identifier for a single deal.
   
   A Leg-Type however is a group of Leg-Names and thus is an identifier for a group of deals.
   
   
   The following list provides the leg type assigned to the functions stored within the given function categories or functions :
   
   

   • FIX - CapeTools FIXED Legs
   • FLOAT - CapeTools FLOAT Legs
   • CASH - CreateCashFlowLeg
   • COMPFIX - CreateZeroCouponLeg
   • COMPFLOAT - CapeTools Compounding FLOAT Legs
   • AVGFLOAT - CapeTools Averaging FLOAT Legs
   • ZCFLOAT - CapeTools ZeroCoupon FLOAT Legs
   • INV_LEG - CapeTools FIXED + FLOAT Legs
   • INV_AVGLEG - CapeTools FIXED + AVERAGE FLOAT Legs
   • INV_COMPLEG - CapeTools FIXED + COMPOUNDING FLOAT Legs
   • STRATEGY_CAPPED - CapeTools Exotic Legs
   • FIXBOND - CapeTools Bonds - FIXED RATE BONDS ONLY
   • FLTBOND - FloatingRateBond or AmortFloatingRateBond
   • ZCBOND - ZeroCouponBond
   • MMBOND - MoneyMarketBond
   • BONDFUT - FwdCouponBond or FwdCouponBond2
   • BONDOPT - QBSBondOption or QBSBondOption2
   • MUNIBOND_muni - FixedMuniBond
   • BOND_book - BondPortfolio
   • SWBOOK - SwapPortfolio
   • BSWBOOK - BasisSwapPortfolio
   • XCCYSWBOOK - XCcySwapPortfolio
   • CDSBOOK - CDSSwapPortfolio
   • CFBOOK - CapFloorPortfolio
   • OSBOOK - SwaptionPortfolio
   • FIXLEGBOOK - FixedLegPortfolio
   • FLTLEGBOOK - FloatLegPortfolio

   
   
   The following (Report) functions will display the leg types given a risk report :
   
   

   • ListYCRiskTypes - for YieldCurve risk reports.
   • ListVCRiskTypes - for VolCurve risk reports.

   
   
   The following (Report) functions go further and display a two column range of LegName and the type associated with it :
   
   

   • ListYCRiskDealTypes - for YieldCurve risk reports.
   • ListVCRiskDealTypes - for VolCurve risk reports.

   
   
   The following (Report) functions will display a list of Leg-Name, given a Leg-Type. Thus if you pass in the type 'FLOAT', all objects created from the CapeTools FLOAT Legs category of functions and that have been processed by the risk report will be displayed :
   
   

   • ListYCLegsRiskByType - for YieldCurve risk reports.
   • ListVCLegsRiskByType - for VolCurve risk reports.

   
   
   From a combination of using the following functions above, you may have decided on a list of Leg-Names and/or Leg-Types that you wish to view a report from. You may also wish to see the whole list, but exclude certain Leg-Names and/or Leg-Types. Which legs will actually be selected given all the possible combinations?
   
   The following list of (Report) functions allows you to view the resulting legs given Leg-Names and/or Leg-Types combinations with an exclusion criteria :
   
   

   • QueryLegsYCRiskReport - for YieldCurve risk reports.
   • QueryLegsVCRiskReport - for VolCurve risk reports.

   
   
   A powerful parameter to note is the 'Operation' parameter. Basically These functions take three lists :
   
   

   • List of Leg-Names to view
   • List of Leg-Types to view
   • List of Leg-Names to exclude

   
   
   How does the function, given this list, decide which legs to accept from the report and which legs to exclude?
   
   This is where the 'Operation' parameter comes into play and takes on the following values, "And", "Or" and "Diff".
   
   If the 'Operation' parameter is set to "And" then all the legs present in **BOTH** the Leg-Names (LimitToLegs parameter) **AND** Leg-Types (LimitToTypes parameter) are taken. Then the legs that are not wanted are excluded (ExcludeLegs parameter).
   
   If the 'Operation' parameter is set to "Or" then all the legs present in **EITHER** the Leg-Names (LimitToLegs parameter) **OR** Leg-Types (LimitToTypes parameter) are taken. Then the legs that are not wanted are excluded (ExcludeLegs parameter).
   
   If the 'Operation' parameter is set to "Diff" then basically we select all the legs within the report, apply the **AND** operator to generate a sub-list, throw away this sub-list and select whatever is left. Then the legs that are not wanted are excluded (ExcludeLegs parameter).
   
   
   Executing the QueryLegsYCRiskReport or QueryLegsVCRiskReport will help you to ensure that you are using the correct logic when trying to compose a list of legs to base your report on.
   
   
   Finally the following (Query) functions will apply a selection criteria to the generated report and list the risk numbers that you are requesting :
   
   

   • QueryYCRiskReport - for YieldCurve risk reports.
   • QueryVCRiskReport - for VolCurve risk reports.

   
   
   The parameters are similar to that of the QueryLegsYCRiskReport and QueryLegsVCRiskReport functions except that you also provide how you would like to see your risk numbers.
   In the case of a Gamma or Volga Report, you can also request for Delta and Vega results as these are computed as well.