Attribution Profile Analysis Framework to Explain PnL within Risk Factors, Isolate the Impact of Unhedged Risk Factors and Capture Higher Order Risk Factors
Today Numerix announces new attribution functionality in Leading Hedge, Numerix’s production platform for end-to-end risk management and the hedging of life and annuity products. Providing a risk neutral or real world stochastic modeling framework, Numerix Leading Hedge can be used for capital calculations, product pricing and ongoing valuations, trading and hedging, and regulatory and accounting compliance. As a sophisticated attribution analysis framework, the new functionality allows drill-down analysis and performance attribution tracking enabling users to explain PnL within risk factors, isolate the impact of unhedged risk factors and capture higher order risk factors, such as cross effects.
Mr. Katsuhiko Fujita of Senior Managing Director, Nomura Research Institute, Ltd. in Japan says, “Our users are highly interested in Attribution Analysis in Leading Hedge. We expect further liability risk analysis as well as improvement of hedge performance with Numerix attribution analysis.”
“Performance attribution analysis is a critical function of any dynamic hedging strategy as risk managers need to explain sources of gains and losses from hedging programs. However, dynamic hedging strategies introduce new risks to the firm including strategy risk, model risk, operational risk and counterparty exposure. While sophisticated hedging programs explain over 95% of hedge PnL for assets and liabilities across all hedged and unhedged risk factors – market risk, actuarial risk and basis risk, small ‘leaks’ can compound over time, or remain hidden until market volatility spikes,” said Pawel Konieczny, PhD, Vice President, Insurance Solutions, Client Solutions Group at Numerix.
Attribution Profile in Numerix Leading Hedge
The Attribution Profile in Leading Hedge is an automated batch process that can revalue both assets and liabilities by shocking one or more risk factors according to their movement between two user-defined market periods. This “attribution shock” functionality applies to market data, inforce data, assumptions, models, and model parameters.
Combined with the existing Risk Profile in Leading Hedge, users can drill down for more granularity to compare Expected versus Actual changes within risk factors. Leveraging this functionality users can tie out all PnL movement and minimize residual unexplained, track hedge effectiveness, and identify biases in hedging strategy. As modeling error will manifest through trends over time, monitoring attribution also provides ongoing real-time model validation. With this capability the highest accuracy possible is achieved through consistent, hybrid modeling for asset and liabilities.
Steven R. O’Hanlon, Chief Executive Officer & President of Numerix concludes: “Through this process users are able to constantly evaluate on a daily basis how well Greeks performed, and how assets changed with respect to liabilities. It allows users to explain a daily change in PnL and determine what risk factor is causing that movement. With this information, users can then report to management if their hedging program is over or under hedged, or if their Greeks are not predicting changes in liabilities that way they should. Attribution is a powerful tool for our insurance customers and we’re proud to be offering it as part of the Leading Hedge solution.”
