Kamakura Risk Manager (KRM) allows users to focus on the managing the firm’s earnings, and ultimately the value of the firm using the following measures:
- Net income simulation on a full credit-adjusted basis with stochastic default, incorporating the credit models of Dr. Robert Jarrow.
- Net income simulation of both the full balance sheet and the transfer pricing portfolio, allowing management to see the relative future movements of hedged and unhedged net interest income.
- Simulation of additions to and roll-offs from the balance sheet to a distant value at risk date, allowing VAR analysis on the balance sheet that you will have then – rather than assuming the future balance sheet will be identical to today. This allows default and loan prepayments to impact measured value at risk.
- Net Income and Balance Sheet simulation for financial planning and variance analysis for monitoring new and existing business activity.
- EaR which show probabilities for net income in the future.
- Sensitivity and Component Analysis measures changes in earnings given parallel and non-parallel interest rate changes and with and without embedded options.
- GAP analysis shows repricing and maturity structure of the firms’ financial instruments.
- Ratio analysis.
KRM is grounded in solid financial theory and allows you to implement leading-edge best practices solutions with a straightforward, user-friendly tool. It provides a practical and effective means of modeling, measuring, and managing earnings risk using both integrated and stand-alone features:
- Account Setup
- Account setup in KRM allows for completion of several model requirements in one screen for logical input of basic account characteristics and new business defaults, reporting hierarchies, and aggregation parameters.
- Process Oriented Assumptions Input
- With open database access and flexible reading, writing, import and export functionality, KRM offers easy maintenance and automated data entry. Current interest rates, yield curves, new business assumptions, and account data can be loaded automatically.
- Flexibility in defining Yield curves and interest rates
- Users can use automatically generated forward rates, or user defined interest rates, with automatic calculation of shocks and rotations for sensitivity analysis
- Audit Reports
- Printed reports showing account characteristics and modeling assumptions can minimize model risk
- Mix and Match Assumptions
- Assumptions in KRM are defined such that the user can create result sets based on different prepayment, new business, and other assumptions for easy comparison and variance analysis.
- Analysis and Reporting
- KRM analysis is facilitated by automatic calculation of basic interest rate risk measurements including interest rate shocks and yield curve rotation, overrides for embedded option assumptions, and EaR measurement. Reporting allows the user to easily compare these results.
- Traditional Earnings Risk Measurements
- Analysis using traditional measures such as single scenario, shocks, rotations, and variance analysis
- Earnings at Risk
- EaR using term structure model gives intuitive measures of probability of exceeding earnings risk limits
- Component Risk Sensitivity Analysis
- User can override assumptions such as prepayments and transaction costs, as well as embedded options such as caps and floors to isolate the impact of each risk component
Kamakura Risk Manager is extremely helpful in analyzing liquidity risk because of the very high speed and precision of the KRM system:
- Ability to process millions, not just thousands, of transactions for maximum accuracy
- Ability to use up to 999 accounting periods
- Ability to have accounting periods that start and end on any calendar date
- Exact data count and holiday conventions for cash flow forecasting
- High quality term structure models overseen by Professor Robert Jarrow for maximum realism in modeling the impact of interest rates and credit risk on liquidity risk
High Volume Processing Capability
A recent survey of most of the 15 largest banks in the United States showed that Kamakura users were processing 30-50 times more data than banks using other vendors’ software. This is due to the speed of KRM analytics and the efficiency of KRM’s data base design.
KRM is particularly powerful because it properly accounts for the treatment of options, embedded options and derivatives, which were once considered a minor part of banking. Today, however, that view has dramatically changed. Bankers recognize that options and derivatives are key; that managing them is a vital strategic issue.
The sweeping impact of option-based risk is now undeniable. On the other hand, the return on options can be substantial, as when they are used to create a competitive advantage. KRM can be used to measure and manage all aspects of options risk and return. For example, consider the options inherent in the following:
- Loans and mortgages can be refinanced or prepaid at anytime
- Deposits can be added to – or withdrawn
- Customers can default on loans – or add new loans
- Customers can draw down or pay off their credit card balances
KRM accounts for these options for making decisions based on risk and return measures such as EaR. KRM allows you to expand your risk analytics to include mark-to-market for pricing, trading, and portfolio management; sensitivity analysis; built-in hedging analytics; VaR, and other decision support measures.
KRM allows you to maximize the opportunities and manage the risk for all types of instruments.
KRM allows the following calculations to be incorporated in net income simulation:
- Simulated default using a default probability unique for each counterparty and consistent with observable market prices for that counterparty
- Simulated default using a user-supplied transition matrix that is consistent with the bank’s historical experience and internal ratings system
- Credit-adjusted value at risk, with explicit modeling of default, for determination of capital adequacy and reserve adequacy.
- Credit-adjusted valuation, allowing explicitly for default, at the end of each accounting period
Using KRM for Liquidity Risk Analysis
The intuitive design of KRM guides users comfortably from step to step. KRM simplifies option-based risk management’s inherent complexity, while always considering an integrated risk management approach.