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Optimizing the Hedging Portfolio with ERMAS Hedging Strategy

Prometeia, the global leader in Risk Management consulting and software solutions, has released a new version of its ERMAS Suite enriched with an innovative tool to simulate the hedging strategies.

Hedging Strategy automatically creates, modifies, and simulates interest rate swaps or currency swaps as necessary to achieve the target exposure associated with interest and/or exchange rates fluctuations, under a specific market scenario, to more effectively support the interest rate risk management process.

“Our solutions for ALM analysis are the result of continuous research and innovation to improve and increase methodologies and techniques for measuring the bank’s exposure to interest rate risk,” says Andrea Partesotti, Head of Enterprise Risk Management Area at Prometeia. “The development of more sophisticated tools, such as hedging swap strategies, aims to better support our clients in measuring, monitoring and controlling interest rate risk and also responding to regulators’ requests.”

The hedging strategy tool allows the user to define the following strategies, which can also be combined and calculated simultaneously:

  • - roll-over of the swaps maturing in a specified time bucket to maintain, increase or decrease the hedging percentage or to achieve the target interest rate risk exposure
  • - unwinding of the swaps existing in a specified time bucket to modify or maintain a specific interest rate risk exposure. A total or partial unwinding strategy can be defined at single deal level or for multiple swaps
  • - hedging underlying to hedge a portfolio of fixed rate assets or liabilities. Total or partial hedging of the underlying amount can be set. Behavioural hypothesis, e.g. prepayment assumptions, can be applied to underlying outstanding profile, as an alternative to the contractual profile. Therefore a macro-hedge of portfolio of asset or liabilities can be simulated, e.g. loans portfolio, to reduce or mitigate the interest rate risk exposure
  • - data entry is also available to feed swap or interest rate options with custom financial characteristics for inclusion in the simulation.

ERMAS pivot reporting and graphical dashboard tools are also available to analyse the hedging portfolios and to support the user in the configuration of the hedging strategies, selecting the most relevant breakdown dimensions and notional or principal flow measures for underlying instruments and hedging swaps.

ERMAS, the new generation of value-centric risk solutions, is used by over 200 clients in more than 20 different countries to support their critical decisions and to comply with local and international regulatory requirements.