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Category Archives: Computational Finance


Bootstrapping the Zero Curve and Forward Rates

Deriving zero rates and forward rates using the bootstrapping process is a standard first step for many valuation, pricing and risk models. Interest rate and cross currency swaps & interest rate options pricing & VaR models, revolving credit facilities & term B loans valuation models,


Using Copulas to model spread between WTI and Brent.

Using Copulas to Model spread between crude oil blends. Brent is the European crude oil blend. WTI is the North American pricing benchmark for crude oil. While Brent is used to price bulk of the crude oil cargoes purchased and sold across the world, WTI


Zen of building risk models. Balls or barrels?

The Zen of building risk models. A model builder speaks about his reason for being. Ask the right question. Answer it quick. The model will take care of itself. That is all there is to building great models.  I build models. In 1987 when I was

Attributes of Economic Capital Model

Economic Capital for banking industry

Economic Capital – Everything you ever wanted to know but were afraid to ask. For the last seventeen years I have hated conversations with board members around economic capital. It is perfectly acceptable to discuss Market risk, Credit risk or interest rates mismatch in isolation


Calculating Economic Capital – Using Leverage ratio

So far we have presented two methods for estimating Economic Capital. The first uses the worst case change in Shareholders equity, the second the volatility of the same changes. The challenge with method one and two is that they use capital adequacy as the determining


Calculating economic capital – Using volatility

In our first method presented earlier for calculating economic capital we used the historical worst case shift. In method two we use volatility. Method two is a variation designed to provide additional flexibility in estimating probability of capital shortfall in the event of market or

Economic Capital - Case Study using Goldman, JP, Wells & Citi datasets

Calculating Economic Capital – A Case Study

Method One Our alternate model for calculating Economic Capital comes in a multiple variation. We do a detailed presentation for method one, followed by smaller posts on each variation. Method one use changes in Shareholders equity as reported in publicly disclosed financial statements to build

Positive gap rules for bank ALM analysis & strategy

ALM training for board & ALCO members.

ALM training for Board members. 7 posts. 60 minutes. I have long felt a need a for a high level overview course on Asset Liability Management training for board members, executive committee and ALCO teams. A course that focuses in equal measure on high level

Net Interest Income Analysis - Bank ALM

Net Interest Income (NII) vs Economic Value (EVE)

Net Interest Income – Earnings versus Economic Value. The two elements used within bank ALM analysis are economic value and earnings. Why is earning emphasized more than value? What is wrong with value analysis? In the ALM world we use two tools to illustrate the impact