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Risk Monitoring Through Turbulent Markets

Zhiyang Zhao
Zhiyang Zhao

Markets change frequently and often erratically, presenting risk managers, asset managers, and investors with enormous uncertainty. Given the market volatility in recent months, it is especially important to monitor real-time risks and to test a portfolio’s resilience under future possible market fluctuations. In this blog post we wanted to talk about how we do that at Imagine and hopefully help our readers to simplify how they monitor portfolios and risks in turbulent markets.

The Risk Summary dashboard in the Imagine Trading Platform is the tool for risk monitoring and portfolio construction, offering the following features:

  • A variety of risk analytics, including Value at Risk (VaR), volatility, betas, Greeks and stress testing, to examine risk from different angles, in a single, easy-to-use, interactive view;
  • The ability to identify and monitor risk at any level of a portfolio, trading desk or firm;
  • A ‘What-If’ function that allows users to see the effects potential trades would have on risk measures. Hypothetical ‘What-If’ trades can be modeled with time horizons lasting a few days or for longer periods;
  • Customized stress tests that users can define on-the-fly to quickly incorporate any perceived trends, anticipated shifts or worst-case market moves;

Results generated by the dashboard can be saved daily, and the data can be used to construct time series of various risk measures.

The dashboard consists of three tabs: the Main tab, the Standard Stress Testing tab, and the Custom Stress Testing tab, as described below.

The Main tab

The dashboard’s Main tab provides risk measures including VaR, volatility, betas with respect to key benchmarks, and Greeks, aggregated at various levels (e.g. Portfolio, Strategy, Security). By drilling down into different levels of a portfolio, users can identify the specific holdings or strategies that are driving the portfolio’s dominant risk exposures.

The upper table in the Main tab displays the risks of the “live” portfolio, while the bottom table includes any ‘What-If’ (potential) trades that users can easily add on the fly. ‘What-If’ trades have not been executed but are used to test trade ideas, allowing the user to see how a portfolio would be affected if the potential trades were to be included. These hypothetical trades are readily identified by the suffix ‘What-If’.

Users can choose to display reported values as a percentage of the portfolio’s net asset value (NAV) or in currency units using a toggle in the upper left corner.

The dashboard main tab

 

The Standard Stress Testing tab

The Standard Stress Testing tab contains a selection of pre-defined, commonly used stress tests that shock factors by various degrees (+/-) and provide the resulting changes in fair value (i.e., theoretical P&Ls) aggregated at any level.

The upper table shows the portfolio’s P&L given shocks to multiple underlying factors, including or excluding shocks to volatility. The lower table shows the P&L based on shocks to multiple factors benchmarked to the price of gold, oil, the S&P index (SPX), or the volatility index (VIX). Users can change the benchmark index through the toggle to the left of the lower table. 

Filters in the upper left corner provide the ability to view selected segments of the positions. For example, users can choose to include or exclude ‘What-If’ trades to see how potential trades may affect the portfolio under stressed conditions. The filters also allow users to view the stress test results for subsets of the portfolio such as a particular asset class, sector, rating, or strategy. 

The dashboard Standard Stress Testing tab

 

The Custom Stress Testingtab

The ‘Custom Stress Testing’ tab provides even more flexibility than the ‘Standard Stress Testing’ tab, empowering the user to construct completely customized stress tests to the dashboard on the fly. 

New stress tests and scenarios can be easily specified by defining them in a Custom Reference Table (CRT), making it fast and straightforward for the end user as it does not require any programming whatsoever. Users can either define a scenario from scratch, or can choose from a library of built-in theoretical and historical scenarios, such as the Lehman Crisis, World Trade Center attack, or the Asian Currency Crisis. This additional flexibility provides a quick way of adapting to market conditions by viewing a wide range of pertinent market moves. 

The dashboard Custom Stress Testing tab

 

Whether you expect history to repeat itself in terms of market shocks and volatility, or believe that new and different patterns will emerge in the future, as you can see the Imagine Trading Platform provides flexible ways to test your portfolios’ resilience. In the face of a wide range of potential market changes, having the ability to test, shock and analyze portfolio risk with a few clicks is something we want all our readers to be taking advantage of.

Sign up here for a presentation, or contact our team to try out these flexible, robust ways to view risk for yourself.

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About the Author
Zhiyang Zhao has joined the Imagine sales team in London office as an intern from January 2020, working on improving and customizing our dashboards for pre-sales projects. With great passion for financial risk management, she is currently pursuing her master degree at the London School of Economics, majoring in Quantitative Methods for Risk Management.

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