Jun 16, 2015

Numerix Snapshot | Global Derivatives 2015 Recap: 5 Days in 7 Minutes

In this special edition video blog Numerix Chief Strategy Officer, Satyam Kancharla joins Jim Jockle to provide his insights from this year’s Global Derivatives Conference. Satyam provides cutting-edge insight into latest quantitative trends shaping today’s financial markets including how institutions are implementing econometric approaches into derivatives pricing and risk management for long term projection of returns and performance, in addition to how institutions are leveraging Adjoint Algorithmic Differentiation to optimize risk calculations, and KVA to measure capital impact on futures trade.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Video Transcript:

Jim Jockle (Host): Hi welcome to Numerix Video Blog, your expert source for Derivative trends and topics. I’m your host Jim Jockle.

Joining me today is Satyam Kancharla, Numerix Chief Strategy Officer, Satyam, welcome.

Satyam Kancharla (Guest): Thank you, Jim.

Jockle: So you have just returned from Global derivatives held every spring. It’s arguably one of the largest quantitative conferences for financial service professionals. Wanted to sit down and as we were thinking about having this discussion, one of the things I thought that was very interesting, and I would love some of your perspective on, was a shift in quantitative finance more out of the theoretic and starting to incorporate more real world modeling into some of their thinking as well as more econometrics. Perhaps you can share some of the discussions that have been around the conference that are really starting to promote this trend.

Kancharla: Every year it’s interesting to note more and more of the econometric or economic views permeating into quant finance. And this is also supported by the underlying trend of people and quants actually moving from the sell-side to the buy-side, so we see a lot of well-known quants and names in the industry have moved from big banks over to big buy-side firms and as we know, as a buy-side firm, one is taking a long term view of things, which is where in addition to the risk neutral mathematics, let’s say of pricing derivatives, and hedging and so on, you also need to have a very sound real world or econometric type of view into things and have a long term projection of returns and performance and so on. So that’s definitely a trend that we see in the global derivatives and the quant finance field in general. 

Jockle: So, one of the questions I want to ask there, so you know we’ve talked a lot about regulatory change and environment and the banks themselves getting pressured and wants to be less risk taking. Is this trend that you’re observing, is that part of the fact that more buy side institutions are being encouraged to incur more risk, or versus the banks. 

Kancharla: Definitely. There are certain types of businesses that banks have exited that buy-side firms are entering into. There’s a lot of buy-side to buy-side trading and margining that’s taking place. And as a result, many of the quant finance leads are moving into the buy-side and it is there that we see this long term view an real world view come into the picture. And the other thing that goes with it is even adopting a returned space approach and a portfolio performance based approach, as opposed to just focusing on the hedge portfolio and derivatives hedging.

Jockle: So, another element that has been kind of dominating the conference circuit for a while has been the valuation adjustments and this year there was a lot on the agenda around capital, KVA. So, perhaps you can share a little bit of the insights around KVA, and where is the market at this point?

Kancharla: Well, talking to a lot of the presenters and clients and so on, KVA and capital is definitely top of the mind for a lot of people. Capital optimization and balance sheet optimization is something every bank is looking at, so there were a lot of discussions around optimizing capital, and KVA is just, I would say, one of the most accurate and front-office ready measures so that capital optimization can take place and all sorts of capital can be incorporated into the price of a derivative transaction. So there was a lot of presentation around KVA.

Jockle: So, capital being incorporated more as a real-time reserve? Or more as, that calculation as an indicative element for more prudent risk management over time?

Kancharla: For the KVA in particular, the capital is really being factored in as a price adjustment. So, unlike a reserve, it’s actually going to impact the price of the transaction. And, at this point, things start to get a little bit interesting since the KVA and the front-office capital measurement and management is not yet fully in sync with the risk management and risk reporting frameworks that many of the banks have. And in many cases, these risk reporting frameworks have been approved by auditors, and they’re not going to change for some time, there is a cycle of change for these bigger platforms. But what people do want to do is in the front office be able to get some sort of indicative measure of capital impact of my future trade. So the next trade, or the next hedge that I’m going to put on, what is the exact capital impact that I’m going to have, and as a result, can I do something that is more capital efficient than what I would do otherwise if I had no idea  what the capital impact would be. 

Jockle: So one of the areas I just want to close with on this topic is, you know we’ve talked a lot in the past about technological advances, and I think one of the keys is the evolution of quantitative finance, and I think we’ve seen a new element of the debate with the addition of AAD to the table. So the classic CPU/GPU debate that got big 3 or 4 years ago, what about multi- threading, and things of that nature. But AAD, really started to dominate elements of the conference give us some insights.   

Kancharla: Yeah, definitely. I think AAD was a continuous theme throughout the conference this year. There has been a lot of good work done on the AAD concept, it’s something that is well known, but I think Jesper and their team at Danske Bank has done a great job bringing this into an environment where quants are starting to recognize it and use it and AAD is a general technique that can be used to optimize a lot of the calculations that take place in quant finance, sensitivities and Greeks being the main one, but there are many other applications in quant finance. So these techniques, along with multithreading and supporting these multi-core architectures, whether CPU or GPU, they’re definitely front and center, and a lot of quant finance libraries and a lot of technology platforms are going through a generational shift, where they’re adopting both multithreading and AAD in their newer versions.  

Jockle: Well, Satyam I want to thank you so much for joining us and sharing some of those insights. And I understand you didn’t get to see the must see panel discussion on “50 Shades of SABR”, so hopefully we can get that one on- demand because that seemed like a must hit of the summer. And again of course we want to talk about all the hot topics that you want to talk on our video blog. And please, join the conversation on LinkedIn, or on Twitter @nxanalytics, and keep the conversation going. And Satyam, thank you so much for your time.

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