October 2008 Fin E and Grid-Computing Presentation by

October 2008 Fin. E and Grid-Computing Presentation by Claus Madsen

Agenda About Fin. E Analytics 2 About Fin. E 5 Dyalog APL in Fin. E. . . 25 2

About Fin. E Analytics Who is Fin. E Analytics ? Fin. E Analytics was founded by Claus Madsen in 2001 on the idea of developing a framework system consisting of a central container of financial components, which can be used by all of the companys financial applications. As the interest for Fin. E increased, the need for more manpower increased. In 2002 Søren Andersen joined Fin. E Analytics. In 2006 Fin. E made a partnership with IT-Practice A/S (www. it-practice. dk) Furthermore, we have a partnership with Six Finansinformation A/S (www. six. dk). (Danish and Swedish financial data) In 2008 Fin. E made a partnership with Techila Technologies Ltd (www. techila. fi) 3

About Fin. E Analytics What do we have? A financial framework system, which covers all kinds of analysis, keyfigure calculations, pricing and risk management of a wide range of financial instruments and derivatives A framework system which offers efficient, centralised and robust financial calculations A finansial system which is independent of the customers choice of database (for marketdata) A framework system that can be used directly from MS Excel We call the framework system: Fin. E 4

Agenda About Fin. E Analytics 2 About Fin. E 5 Dyalog APL in Fin. E. . . 25 5

Fin. E The core of Fin. E is a set of advanced financial components which: Are built on 18 years of experience from similar development projects, Include methods and calculations for a wide range of financial products – probably the largest range compared to any similar system Offers 1200+ financial functions Very flexible and easy to integrate with other IT systems COM (. NET) interface with all the integration possibilities that these offer (VB, VBA, C++, C#, etc. ) Web Services etc. Database indepencende Use Fin. E with or without marketdata Integrates with all common databases (Oracle, Sybase, MS SQL Server). Generic database interface 6

Fin. E QA Automated tests Focus on new and relevant financial science Up-to-date with market conventions Focus on operational optimization of financial problems => some of the fastest calculations in the market on e. g. motgage backed-bonds, Rente. Max, etc. Flexibility Database independence and integration possibilities gives higher fiexibility towards the customers existing systems We keep a close contact with our customers and a very anxious to hear about specific methods and wishes for new components Extremely fast Time-To-Market 7

Fin. E Fin. E_Bolig. X Fin. E_Forwards Fin. E_Bonds Fin. E_FXOptions Fin. E_Bond. Options Fin. E_HPR Fin. E_Caps. Floors Fin. E_Inflation Fin. E_Credit Fin. E_Index. Bonds Fin. E_Credit. Bonds Fin. E_Inflation. Derivatives Fin. E_Credit. Derivatives Fin. E_Monte. Carlo Fin. E_Correlation Fin. E_MBB Fin. E_CTD Fin. E_One. Factor. Lattice Fin. E_Database Fin. E_Portfolio Fin. E_Datefunctions Fin. E_PCA Fin. E_Debt Fin. E_Swaps Fin. E_Equity. Options Fin. E_Swaptions Fin. E_Flex. MBB Fin. E_System Fin. E_Floating. Rate. Bonds Fin. E_Termstructures Fin. E_Volatility 8

Fin. E Fin. E_Bolig. X Flexible and fast MC pricing engine with user controls Specify you own extended Bolig. X Bond using tailor-made functions Complete control over the fixing rules Cash flow generator with optional convexity adjustment Yield calculations – including: Redemption Yield Risk Measures - including: Imp OAS Spread and Modified Duration Delta-Vectors 9

Fin. E Fin. E_Bonds Jurisdictional specific models (27 countries) T-bills Zero-coupon Bonds Amortizing Bonds Bond Forwards and Futures Specify your own Bond using Taylor made functions Pricing and Accrued Interest calculations Risk Measures – including: Imp. Yield Spread, Modified Duration and WAL Yield calculations – including: Redemption Yield and Japanese Yield Cash flow generator Cost-Of-Carry analysis Barbell Strategies Delta-Vectors 10

Fin. E Fin. E_Bond. Options Models: Black 76, CIR Deterministic Shifts, Ho-Lee, Hull-White, Quadratic Price, Volatility Implicit Strike and Volatility Fin. E_Caps. Floors Models: Black 76, CIR Deterministic Shifts, Ho-Lee, Hull-White Price, Volatility Implicit Strike and Volatility Estimating model parameters using Caps/Floors Market Data Fin. E_Credit Estimation of default probabilities using a variety of methods, for example: Using market prices of credit bonds Using the Transition Matrix tools: Calculating the Transition Matrix for any time-period 11

Fin. E Fin. E_Credit. Bonds Specify your own Credit Bond using Taylor made functions Calculation using either the Credit Curve or using the default probabilities Cash flow generator Yield calculations – including: Redemption Yield Risk Measures – including: Imp. OAS Spread and OAS adjusted Duration Delta-Vectors Fin. E_Credit. Derivatives Pricing, keyfigures etc. CDS, 1 st to default, nth to default CDO’s – incl. STCDO and more 12

Fin. E Fin. E_Correlation Linear Correlation, Rank Correlation, Correlation assuming a GBM process and EWMA Estimation of the Correlation Matrix given a Target Correlation Matrix Fin. E_CTD Know the Market rules f 0 r CTD-Futures, for example: CBOT, EURONEXT, EUREX etc Cheapest-To-Deliver calculations and determination of Conversion-Factors Specify you own CTD-Futures using tailor-made functions Calculation of Risk-Measures and Delta-Vectors Fin. E_Database Linking to internal database with Danish/Swedish bonds Flexible data queries Define and manage generic bonds Define and manage yieldcurves/swapcurves Calculating poolfactors 13

Fin. E Fin. E_Datefunctions Around 30 Functions to handle anything in connection with day-calculation and 19 Calendar Conventions Built-in Holiday Calendars + The ability to Customize Holiday Calendars Fin. E_Debt Advanced payment structures – including for example Step-Up Coupon structures and variable amortization schedules Pricing Cash flow generator Fin. E_Equity. Options Price European options using a variety of models: Black 76, Black-Scholes, Garman-Kohlhagen, Displaced Diffusion, CEV and CRR Price American options using a variety of models: Barone-Adesi, Ju-Zhong and CRR Powerful and flexible CRR implementation Calculation of sensitivity numbers, like for example: Delta and Gamma 14

Fin. E Fin. E_Flex. MBB Flexible and fast MC pricing engine with user controls Define your own prepayment model Specify you own extended Flex MBB using tailor-made functions Complete control over the fixing rules Cash flow generator Highly flexible pricing engine for Flex MBBs: User defined CPR/SQM User defined CK 92 Yield calculations – including: Redemption Yield Risk Measures - including: Imp OAS Spread and OAS Adjusted Duration Delta-Vectors 15

Fin. E Fin. E_Floating. Rate. Bonds Specify you own extended Floating-Rate Bond using tailor-made functions Complete control over the fixing rules Fully flexible methods for specifying how to calculate the coupon, this includes for example: Super Coupon Cash flow generator Yield calculations – including: Redemption Yield Risk Measures - including: Imp OAS Spread and Modified Duration Delta-Vectors 16

Fin. E Fin. E_Forwards FRAs – pricing and risk measures FX Forwards – pricing and risk measures Equity and Commodity futures – pricing and risk measures Interest-Rate Futures – pricing and risk measures Fin. E_FXOptions Price European options using a variety of models: Garman-Kohlhagen, Displaced Diffusion, CEV and CRR Price American options using a variety of models: Barone-Adesi, Ju-Zhong and CRR Powerful and flexible CRR implementation Calculation of sensitivity numbers, like for example: Delta and Gamma 17

Fin. E Fin. E_HPR HPR: “The return over a pre-defined period, given assumptions about the primo values of the assets, the removed cash flows, the refinancing of the removed cash flows and the ultimo values”. Flexible and powerful generic HPR module Include MBB prepayment model forecast in the calculation User defined prepayment schedule Work with multiple Yield-Curves Control OAS/NPV evolution Fin. E_Inflation Imply CPI-Curve from IR-Changes and spill-over effect Forecast missing CPI-Data using standard ISDA rules Etimating CPI-Curves using Inflation Swaps-or Index Bond Data – taken into account seasonality Switching between Inflation-Rate curves and CPI-Curves Constructing CPI-Curves 18

Fin. E Fin. E_Index. Bonds Type of Index Bonds include OATs, UK Index-Linked Gilts (IGs), Swedish Index Bonds, TIIS and Danish Index Bonds or similar rules Specify you own extended Index Bond using tailor-made functions Complete control over the CPI-Data Cash flow generator Yield calculations – including: Redemption Yield Risk Measures - including: Imp OAS Spread and Modified Duration Delta-Vectors 19

Fin. E Fin. E_Inflation. Derivatives Specify you own extended Inflation Swaps using tailor-made functions – including Yo. Y Inflation Swaps Cash-flow generator Calculation of Spreads and Fixed Inflation Rates Delta-Vectors Risk Measures Fin. E_Monte. Carlo Simulate models belonging to the MCEV class Techniques for matching the initial yield-curve Several ways to generate the random numbers - for example Box-Mueller Multiple variance reduction techniques available, like for example Brownian Bridge and Measure Transformation 20

Fin. E Fin. E_MBB Treat MBBs as straight bonds Highly flexible pricing engine for MBBs Include CK 93 User defined CPR/SQM User defined CK 92 Any Yield-Curve model from One-Factor Lattice can be used Specify your own MBB using Taylor made functions Define your own prepayment model Cash flow generator Risk Measures – including: Imp. OAS Spread and OAS adjusted Duration Yield calculations – including: Redemption Yield Delta-Vectors Calculation of refinancing profit 21

Fin. E Fin. E_One. Factor. Lattice Models: Hull-White, Black-Karisinski, BDT, Quadratic, CIR deterministic Shifts European, American or Bermudan Instrument coverage: Bond-Options, Swaptions and Cap-Floors Pricing and Risk-measures Estimating model parameters using Market Data Fin. E_Portfolio Calculations on portfolio level Grid Calculation Interface Fin. E_PCA Principal component analysis Estimating principal factors Simultaneously work with 5 different PCA models 22

Fin. E Fin. E_Swaps Basis Swaps, Amortizing Swaps and Rollercoaster Swaps, Compounding Swaps, Libor-In-Arrears and CMS/CMT Power Swaps, Average Rate Swaps and General mismatch Swaps Interest Rate Swaps and Cross Currency Swaps Equity and Commodity Swaps Par Swap Analysis and calculation of Libor-Spreads and Swap-Rates Delta-Vectors Cash flow generator Fin. E_Swaptions Models: Black 76, CIR Deterministic Shifts, Ho-Lee, Hull-White Price, Volatility Implicit Strike and Volatility Estimating model parameters using Swaptions Market Data 23

Fin. E Fin. E_Termstructures Estimate the Bond/MBB/Credit Yield-Curve Estimate the Swap Yield-Curve – include: Deposits, FRA’s, Futures, Swaps Shift the Yield-Curve using Key-Rate Shifts, Bucket Shifts or Twists Tools for Yield-Curve interpolation Build the Yield-Curve using your favorite Yield-Curve model: Hull-White, Ho-Lee, CIR Extended, Quadratic, CIR Deterministic Shift, Vasicek Construct Forward Yield-Curves Fin. E_Volatility N-period Historic Volatility 6 Univariate Garch Models Volatility assuming a GBM process EWMA Garch Volatility forecast 24

Agenda About Fin. E Analytics 2 About Fin. E 5 Dyalog APL in Fin. E. . . 25 25

Dyalog APL in Fin. E Dyalog APL is used as an in-process OLE-Server – 99. 9% af all APL is embedded in a Com-Object! Other Software used in Fin. E: . NET packages: Chilkat. Dot. Net 2. dll – used for FTP, ZIP, XML and Cryptation As. Pose. Cells. dll (. NET 2. 0) – used for communicating with Excel La. Pack – for some math (eigenvalue calculation etc) Mat. Lab Com-Object – is in the process of being replaced with Extreme. Numerics. dll (. NET 2. 0) – for optimization etc C++ are used for connecting Fin. E-Core to Excel VBA for building the interface in Excel Generic Database Interface uses SQAPL 5. 0, most widely use is with SQL-Server 2005 Most importantly – for the presentation here – we use Techila Grid for performing Grid- Computation! (Java + C++) 26

Dyalog APL in Fin. E Grid Computing…. Why is that of interest? Some type of Instruments are fairly complex, and to price them (even more importantly to obtain risk-measures) is therefore a relative slow process In Risk-Management – at least if we do not wish to rely on a Gaussian Distribution Assumption – we need to perform a lot of calculations in order to derive the return distribution for the portfolio This is even more pronounced when perform “What-If” calculations! In ALM (Asset-Liability-Management) we in general also need to perform many calculations Remark: All-in-All we need to do a huge amount of calculations, and even on a moderate complex portfolio that is time-cosuming! 27

Dyalog APL in Fin. E Implementing Grid Computing in Fin. E FFL_Init initializes the Grid (incl. loading in methods from the Grid-dll) Port. Calculate If Grid is not available (or Port. Set. In. Grid = “NO”), then all calculations are performed locally If Grid is available (and Port. Set. In. Grid = “YES”), then calculations are done in the Grid The Main function is: RUN_PORTFOLIO_IN_GRID 28