Pricing Modes Pricing “Modes” - when are they used? Spread followers (track but still have some “specific risk” Yield leaders (highly liquid benchmark / indices) Price idiosyncratic (high yield) In the end we always need a price to calculate PnL

Bucketing by Maturity Create 4 sub-books by “remaining term” 0-2 years 0 < remaining_term <= years 2 < remaining_term <= years 5 < remaining_term <= years 10 < remaining_term Easy way to chop up your risk by the parameter that drives rate sensitivity the most (time left to maturity) Calculate remaining_term on everything in the tradingbook.txt then put in 1 of the 4 buckets Either create 4 sub collections or scan once and maintain structure per bucket

Basic VaR Categories Historical Simulation –“Full re-val” or “Greeks based” –Simple, explainable, repeatable –Supplement with stress testing –Need lots of historical data –Can proxy to indicies and do a specific risk add-on” Variance/co-variance –Correlations maintained in a matrix –Unlike historical which captures correlations by default (just add PnL vectors) –Example FX and IR Simulation on normal distribution function –Random draw against a probability density function

Basic VaR categories cont… Historical Simulation –Full re-val better for “path dependent” products and capturing non-linear behavior –“Greeks based” (simpler to implement and less computation) Supplement with stress testing –Hypothetical (the black swan) –Actual past extreme event “greatest hits” Depends on history and how far you look-back is… Depends on availability of clean historical data (no holes) –Per security –Per benchmark Can add on a “index tracking error” or “specific risk”

VaR Implementation Historical simulation Parameterize by “holding period” and “confidence interval” e.g, 1 day, 99% confidence interval At least 10 days of historical data (in practice min of 3 years) Each security will have an associated historical file Name will be the unique ID in our data file for ex., “SBB_0001.txt” Each historical file will have either: YIELD SPREAD PRICE Column based like our other data files Pricing modes won’t be mixed (all YIELD or all SPREAD, etc.) Refer to Spreadsheet example

VaR Implementation cont… 1 data file per security ex: “SBB_0001.txt” –At least 10 days of data –There will be an historical file for each benchmark security T2, T5, T10, T30 –For spread priced you will have to look up benchmark yield for that day –New SBB_io_class.h/.cc Date ValType ValValue DV01 Benchmark ValType can be either “YIELD”, “SPREAD”, “PRICE” Benchmark will be string equal to ticker in our yieldcurve.txt file e.g, “T2” Calculate a PnL vector for each security Total VaR for book is derived by: – adding the individual security vectors –calculating using confidence interval “90%” Var will have to be “attributed” (is the PnL due to credit spread or interest rate?) –Benchmark yield movement (yields in our treasury.txt) –Credit spread movement (for bonds that are priced by SPREAD) Historical files will have spread of yield per day For each day we’ll have to calculate price then calculation price changes between days Our PnL vector is percentage changes of price between days Refer to spreadsheet

Enhancements to server-side Pricing “Modes” spread, yield, price - when are they used? VaR of the book Expected (from history) vs Potential (from stress testing) Time “holding period” will always be 1 day In practice this could be be 5 or 10 days. Parameterize by confidence interval (could be either 99% or 95%) How did VaR change with book composition and/or market data? PnL “Attribution” - interest Rate (IR01) credit spread (CS01) Segregate or calculate by quality types Above/below Investment grade By quality code

Server-side Mechanics Test all of your server capabilities with simple Python driver Server-side API is determined by how you craft your message set Message set choices ASCII or Binary - go ASCII so you can debug Balancing process hop frequency vs. server-side grouping of results Client/Server concerns Recovery - what happens when your server crashes? Sync or async - start async and you can always go sync Sharing data between compute processes Sourcing data inside the compute grid Case study - Govt bond trading desk pricing/risk app

Performance Measurement Now that we have a server… Parameterize start_clock(…) and end_clock(…) which are called from START_TIMER()/END_TIMER() New SBB_util.h/cc will be posted Return real, user, system measures via message to client Also measure net time spent in the client process Net sojourn time + client overhead for each user operation Display real, user, system on the GUI at bottom of screen Example (see spreadsheet V2 mockup)

Deliverables for next week Build a simple client (in whatever language you choose) Serverize your executable Spawn your server when you start your client –run.sh to start your server in background (put & at after your executable) Run your client –Second line in run.sh after starting your server Display 1 number to stdout when the client runs (no user trigger) Return the total position of the book Position = total Amount of the book Quiz 2 of 3 will be in two weeks – Nov 10th