Brexit: Imagine the Consequences
At Imagine, our job is to help clients better understand risk. We enable our clients to estimate risks to their positions and portfolios ahead of both known and unknown critical market events. For example, historical simulations formed from previous significant shocks (crash of 1987, September 11, etc.) allow for a visualization of the effects of sharp changes in market conditions that, by definition, are hard to predict. These simulations, however, are not just determined from past events.
This month, June 23rd to be precise, is set to deliver a potentially very large shock to financial systems in the UK, across Europe, and globally too. Both the buy and sell side point to sharp falls in risk asset valuations in the event of a Brexit. The probability of a Leave outcome changing sharply from one day to the next, means prices will also sharply change. Imagine’s real-time risk engine and customizable analytics allow shock inputs to be defined from either market data held in your system, or from data you can set manually and adjust “on the fly”.
Highlighted below are some typical market scenarios from both Leave and Remain outcomes, and how they can be used as inputs to help offer insights and estimate exposures:
|Asset Class||UK Remains||UK Leaves|
|UK Bond Prices||1.50%||-3.00%|
|European Bond Prices||0.30%||-2.00%|
|US Bond Prices||-0.50%||3.00%|
You can enter the above hypothetical shocks into Imagine as the values to shift respective underlying asset prices. Imagine’s analytics applies historical statistical relationships between your positions and the shocked input instruments you define to generate the estimated effect on your holdings. Our Dashboards allow you to define an aggregation of shocked positions into a multitude of combinations to better describe, and uncover, pockets of risk nested within your portfolios. Once you identify the risk, you can drill in to see what parts of your strategies are most exposed with expectations of Brexit. And, crucially, this does not just apply to an event such as the UK’s referendum. Any event that your business or your investors require stress testing against can be calibrated for under your own assumptions, research, and analysis. Contact Imagine and we will create the stress test your business or investors need to help you evaluate your exposure.
Example of Aggregation (Industry)
The stresses described in this blog post illustrate one possible scenario and are intended to be used in general as guidance towards risk management of market events.
In times of stress in the markets, not only does volatility increase for individual assets, cross-asset correlations can increase dramatically as well. This results in a “double whammy” for a typical portfolio because the portfolio’s volatility increases due to both effects.
Those responsible for maintaining a margin system often feel that they are drowning in data management issues. In part two of this series we discuss ways to make margin calculations far more efficient and meet the firm’s need for answers in real-time.