New Version 7.1 of Kamakura Risk Manager Released to Clients in 32 Countries

New York - 9 December 2009

Kamakura Announces Dramatic Enhancements to Integrated Risk System

Kamakura Corporation announced Wednesday that Kamakura Risk Manager Version 7.1 has been shipped to clients in 32 countries around the world. Kamakura reported that very significant advances in speed, accuracy and product coverage have resulted from insightful client suggestions and risk management insights of Kamakura Managing Director for research Robert A. Jarrow, who recently advised the U.S. Department of the Treasury on the valuation of warrants issued under the government’s Troubled Assets Relief Program. The new version of KRM has already been reported to run in 30-90% less time, depending on the prior KRM version, on client sites due to breakthroughs in both financial theory and computer science. Perhaps the biggest breakthrough has been to more fully exploit Professor Jarrow’s insights on reduced form event modeling. Version 7.1 of KRM exploits that fact that, conditional on the values of the macro factors driving default, the actual default/no default of any two counterparties is conditionally independent. This allows distinct and powerful user control with separate “dials” for macro factor simulation and default simulation on a fully integrated basis. The new version also exploits computer science synergies that allow interest rate index modeling technology to be used to model default more accurately, that allow default technology to be used to model prepayments on a integrated basis, and which default probability technology to be applied to integrated operational risk simulation for the first time.

Kamakura’s President Warren A. Sherman said Wednesday, “Version 7.1 of KRM is a huge step forward in integrated risk technology. In combination with our clients’ advice, the Kamakura research and development team in Honolulu has brought the best of breed simulation technology from astrophysics and physics to apply state of the art risk management and finance to portfolios of unprecedented size. New Version 7.1 offers unparalleled integration between formerly separate disciplines: market risk, interest rate risk (“asset and liability management”), credit portfolio management, economic capital, funds transfer pricing, Basel I and II capital calculations, and operational risk. Our clients have been very impressed with the increased understanding of risk and return and the huge cost reduction they can achieve by replacing multiple silo-oriented legacy risk systems with the integrated risk capabilities of Kamakura Risk Manager. Moreover, clients have been quick to point out to us that KRM users have navigated the 2007-2009 credit crisis with great skill, while legacy risk technology has been called into question.“

Among the new features in Kamakura Risk Manager Version 7.1 are the following capabilities:

• Enhanced capabilities in credit risk management
• Creation of consistent but separate simulations for macro-economic factors (“outer loop simulations”) and probabilities derived from them (“inner loop”), like the simulation of default/no default using a date and borrower specific default probability formula with simulated macro factors as inputs
• Increased mathematical flexibility in modeling default probability formulas and interest rate formulas. The logistic function (say for the default rate) can be an input for modeling floating interest rates, as can the natural logarithm and exponential function. Logistic functions can also take other logistic variables as inputs, included lagged logistic functions. These expanded indices can be used across the full span of credit risk, market risk, interest rate risk and funds transfer pricing calculations in KRM
• Increased flexibility in forecasting forward using lagged values for interest rates and macro-economic factors like home prices as inputs to default, prepayment, spread and interest rate relationships.
• Enhanced modeling of loan guarantees for any fixed or floating rate structure
• Ability to model default using variables which change randomly in an auto-regressive moving average fashion
• Enhanced joint modeling of prepayment and default using multinomial logit
• Enhanced capabilities in interest rate risk management and funds transfer pricing
• Updated calculations for transaction level duration and average life
• Implementation of the option to allow negative interest rates, which have been common in markets like Hong Kong.
• Ability to model dividends on common stock as a function of interest rates and other macro-economic factors
• Enhanced ability to use exchange traded futures contracts as inputs to interest rate and default probability indices
• Enhanced flexibility in modeling of interest and principal by exact day count
• Enhanced modeling of graduated payment structures such as the “option ARMS” structured in the United States
• Enhanced flexibility in modeling index-linked principal structures with multiple principal payment dates
• Enhanced modeling of multiple disbursement structures
• Enhanced modeling of floating rate securities with random principal amortization features
• Reporting of standard deviation of option-adjusted spread
• Enhanced capabilities in valuation and market risk
• Enhanced formula-driven credit spread modeling
• Enhanced modeling of multiple risk insurance and reinsurance policies
• Enhanced modeling of property and casualty and political risk insurance and re-insurance policies
• Enhanced modeling for structured or “packaged” deals with more than one underlying reference transaction
• Ability to model amortizing caps and floors
• Enhanced modeling of corridor and knock-in/knock-out caps and floors
• Enhanced accounting options for non-options-related equity securities
• Addition of barrier options on equity indices
• Addition of binary equity index-linked bonds and swaps
• Addition of callable equity index-linked bonds and swaps
• Enhanced ability to model delays in settlement of forward foreign exchange contracts
• Modeling of no touch, double no touch, one touch, double one touch, and rebate foreign exchange rate options
• Enhanced modeling of stop-loss strategies on structured or “packaged” deals
• Substantially enhanced granularity in modeling controls for structured products
• Enhanced access to Markit Partners’ structured products libraries
• Updated interactions with libraries of Andrew Davidson & Co. and Intex
• Enhanced modeling for both funded and unfunded synthetic CDOs
• General systems enhancements
• Increased flexibility in defining and analyzing the impact of fees on cash flow, financial accruals and valuations. Financial accrual calculations allow the user to select from 4 different methods for accounting for fees
• Refined calculations for instruments with sinking funds
• 15 new user-defined fields added to the KRM portfolio table
• Enhanced design for the product ID screen by which users specify modeling assumptions for each “product ID” or class of transactions
• Enhanced ability to create a forecast using constant risk factor values with high ease of use
• Enhanced creation of calendar date-based modeling periods
• Expanded capabilities for modeling “new business,” transactions not yet originated by the firm, including the ability to specify the credit rating of the new business
• New web-based reporting using the third generation KRM-rp Risk Portal reporting package

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