Fixed Income: IR Hedging Matrix & Portfolio Analytics

Nowadays, it is common practice to utilize fixed income instruments to hedge against the unpredictable equity market. Yet fixed income instruments have their own interest rate risk that requires hedging as well.

Imagine’s interactive interest rate hedging tool, the IR Hedging Matrix, enables users to evaluate interest rate risks associated with any portfolio, book, or ledger, and returns the number of hedge contracts needed to hedge the interest rate risk.

Interest rate exposure and hedging contracts can be seen across all yield curves associated with a holding’s pricing environment. In the illustration below, we choose the Risk Curve “AUD-GOVT”  and then right click Load Risks => Default, as below.

The first row displays the Dv01 of the entire portfolio and the corresponding number of contracts needed to make the portfolio Dv01-neutral (for the respective Risk Curve).

The second column, dHtot(R), is the risk exposure per instrument that makes up the yield curve. Since AU5YT=RR is the main contributor to the yield risk (-569.11 out of -687.17), by shorting 1.41 units of the AU5YT=RR bond contract, the portfolio manager can hedge the majority of the portfolio’s AUD-GOVT Dv01 risk. The fact that the Dv01 risk primarily comes from AU5YT=RR is intuitively in line with the maturity of the treasury bond being analyzed: AUGV 2.25% 11/22.

However, considering that it’s not conventional to sell 1.41 units of the said hedging instrument, the user can override the optimal hedging units, initially calculated from the Recalc Hedge option, by directly keying in the intended hedging units in the first row for each instrument. In the example below, the unit of AU5YT=RR bond was changed to -1.00 and the hedging matrix automatically calculated the portfolio’s Dv01 risk being hedged as 522.00 (shown in dHtot(R)). The user can always return to optimal hedging scenario by right clicking and selecting Recalc Hedge.

To complement the IR hedging tool, users are able to customize calculations based on Imagine’s Fixed Income sensitivity analytics (such as Duration, Mod Duration, Convexity, Mod Convexity). Below is an illustration of a custom column built for this purpose.

In the example below, we look at a portfolio’s aggregate yield/duration/convexity calculation along with the contribution of each holding to the whole portfolio.

What’s more, Imagine is building a dedicated web portal – myImagine – to allow users access to its portfolio management solutions from any browser, smartphone, or tablet.  The same IR hedging matrix demonstrated in this article will be accessible in a portal as shown below:

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About the Author
Jianyao (Janelle) He recently joined Imagine with varied internship experience in process automation and programming from well-known financial institutions. As a member of Imagine’s APAC Consulting team, Janelle is currently engaged in client customization projects. She is pursuing a BSc. degree in Quantitative Finance and Actuarial Mathematics from The Hong Kong University of Science and Technology. She can be reached by email.

Analyzing Exposures to Bitcoin in Real-Time

Recently, the price of bitcoin has reached a record high—increasing by more than 500% since early this year. Due to its decentralized nature and the popularity of block chain technology, there are those who see a bright future for cryptocurrency. Furthermore, the performance of bitcoin investments has attracted the attention of traditional investors looking to hop on the bandwagon through investments in companies likely to be impacted by this new technology.

Imagine’s constantly-expanding data offering allows investors to access historical prices of the bitcoin cryptocurrency (using the symbol USDBTC). With this data, investors track the relationship between holdings and bitcoin using a historical price time series of a portfolio containing holdings with cryptocurrency exposure. They then create a custom calculation (custom column) to calculate beta between the daily, weekly, and monthly price of each holding, and that of USDBTC within a certain time frame, e.g., 90/180/365 days.

The customized beta calculation can be displayed as a standalone portfolio column, or  incorporated into more advanced custom calculation columns, as shown below.

Investors looking to analyze the correlation between bitcoin and companies influenced by cryptocurrency utilize Imagine’s regression tools, either from the Imagine Trading System  (ITS)  or via the Imagine Financial Platform (IFP).

ITS users use a Multi-factor Regression tool that runs a least-squares regression on the portfolio to solve the beta relative to the chosen factor of USDBTC. The generated beta details can then be utilized by Imagine’s other risk tools, like a random Monte Carlo simulation.

Imagine 8.1 introduces the ability for an investor to run the multi-factor regression via an IFP app. Similar to the tools available within ITS, an IFP app offers the flexibility to define inputs like data source frequency, independent factors, time frame, and securities to be analyzed.  The output gives the result based on the desired setup.

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About the Author
Jie Shen
recently joined Imagine with more than three years’ experience in consulting and workflow customization in the financial technology industry. Jie is a member of Imagine’s APAC consulting team and will engage in new client implementation projects. She holds a PhD in Financial Mathematics from The City University of Hong Kong. She can be reached by email and phone: +852 3929 2268.

Imagine & Excel™ : Enhanced Power Without the Learning Curve

Should you use the IFP Excel Add-In?

You already know Imagine Software is the award-winning and leading provider of real-time portfolio management and risk and regulatory solutions for financial firms worldwide. And on nearly every desktop is the powerful Microsoft Excel—arguably the optimum application for data analysis with an unmatched ability to visually organize data in charts or graphs and easily view trends and patterns.
Now you can combine two powerhouses – Imagine and Excel – and the resulting possibilities are nearly endless.

  • Do you want to streamline your business processes and perform the same functions as I/O Services but with a simplified process and in one file?
  • Do you want to leverage your Excel expertise and easily import real time Imagine data, access data/price feeds, calculate Greeks and run risk/stress analysis?

What exactly does the Excel Add-in do?
The options range from simple standalone functions you can type into a cell – like a standard formula – to custom spreadsheets and apps developed for you by the Imagine consulting team that rely on IFP Apps, enabling you to easily:

  • download position or pricing information from Imagine
  • manipulate and/or graph derived data within a few moments
  • incorporate proprietary data and update Imagine with the click of a button

The IFP Excel Add-in is fast, powerful, and configurable. Use your current apps, apps available on the marketplace, or contact us to create a custom app or spreadsheet specific to your workflow process and needs. Watch our demo to get an idea of what’s possible with the Excel Add-in.

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About the Author

Brian DeLuca provides quantitative support, implementation of new clients, and has built numerous applications in JavaScript using Imagine’s IFP engine. Involved since the initial phases of IFP, Brian spearheaded training internally and externally for the Imagine Financial Platform. Brian also assisted in the development of the IFP Excel Add-In.

Brian holds a Masters in Quantitative Finance from Rutgers University. Brian can be contacted by email or phone: 646-827-4418