RiskProfiler™

Risk Profiler™ is AD&Co.'s database-driven (MS SQL or Access) valuation solution that incorporates standard and advanced valuation techniques including OAS, prOAS, credit OAS (with the LoanDynamics™ Model) and derivative pricing. The thoroughly designed front-end exposes market data, valuation options, prepayment and LDM tunings and results. Multi-dimensional risk measures can be compiled for large portfolios of MBS, ARMs, CMOs (including credit impaired instruments) and standard rate derivatives to produce portfolio or strategy level summary reports.  When processing credit-impaired instruments RiskProfiler depicts histograms for defaults, losses and write-downs, along with traditional valuation outputs.

OAS Subroutine

We distribute dynamically linked libraries for Windows and shared objects for many flavors of UNIX. This application provides unlimited operational power accessing large-scale corporate databases on virtually all computer platforms. In addition, Algorithmics, BearMeasurisk, Murex, Reuters, Summit and BancWare Systems have integrated our OAS libraries into their broader analytical solutions.

Excel

The Excel interface is transparent and ideally suited for quick ad-hoc analysis. Each position is entered as a single row, so any size portfolio can be priced. The Excel interface is an excellent validation tool for clients that have integrated the subroutine into a proprietary system.

OUR APPROACH TO VALUATION MODELING

OAS Adjusted for Credit

The Credit OAS methodology reflects both prepayment options and default options (losses) exercised by borrowers. The complete option-and-credit-adjusted valuation methodology runs specialized Monte Carlo with two key stochastic factors, interest rates and home prices.   The analysis is performed loan-by-loan with all modeling set-ups, “tunings” and default values exposed to and controlled by the user.

...and other Credit Analyses

• Breakpoint ratio analysis and credit scenario grid
• Histograms of write-downs, losses & defaults for bonds & portfolios
• Missing data inspection and replacement tool
• Sensitivites to model tunings & home price factors

Prepay Risk Neutrality

Prepay-risk-and-option-adjusted spread (prOAS), available only with VECTORS™ Analytics, is a measure that accounts for the risk premium built into MBS prices due to prepayment uncertainty. Create a risk-neutral model by tuning the turnover and refinance parameter dials of the base prepayment model using available TBA prices or the IO/PO valuation parity.

Improved and Controlled Accuracy with Monte-Carlo

We value structured CMOs and ABS with random Monte-Carlo simulations. Though our standard Monte-Carlo utilizes common enhancements like "rate fudging" or antithetic reflection, we recommend using our enhanced sampling method known as quasi Monte Carlo. In quasi Monte-Carlo, after random shocks are generated and ortho-normalized before they are actually used. This pre-processing step ensures that the shocks are serially independent and, of needed variance (hence volatility). Tests show that this quasi Monte-Carlo method is twice as accurate as regular Monte-Carlo for the same number of paths.

"Use Backward Induction When possible"

Used exclusively by our system, backward induction on a single-factor interest rate grid allows you to accurately price MBS pass-throughs nearly instantly. VECTORS™ Valuation Models converts OAS into prices for in about 0.1 seconds. Moreover, multiple scenario prices and duration and convexity measurements are taken from the same valuation grid in no additional time.

INTEREST RATE MODELS

In addition to using VECTORS™ prepayment, credit models, and HPI Generator, users may select among three 1-factor short-rate models, Hull-White, Black-Karasinski, Squared Gaussian and a 2-factor Gaussian model. Every interest rate model can be instantly calibrated to a swap or Treasury curve and a matrix of at-the-money (ATM) swaptions. Each of our models can operate with either time-dependent or constant volatility. With the ATM volatility surface used as the input, volatility skew is completely controlled by the model selection itself.

INTEGRATED DATA LINKS

For structured deals, our valuation models are programmed to include seamless links to Intex or Markit/Chasen. The Bloomberg API utilities are also built in to automatically load market rates, volatilities, MBS indicatives and even collateral details.

RELATED RESEARCH

The Concept of Credit OAS in Valuation of MBS
Prepayment Risk-and-Option-Adjusted Valuation of MBS
Divide & Conquer: Exploring New OAS Horizons, Parts I, II & III
Interest Rate Modeling: A Conscientious Choice
An Implied Prepayment Model for MBS