Risk Matrix Window

When assembling a strategy, it is useful to know what the risks of a given strategy would be if the market data was to change. For example, you may want to know what would happen to the value of a strategy if the volatility shifted upward by 3% or if the spot moved down by 2.

The Risk Matrix window lets you see how the risk in the given strategy on the defined valuation date responds to changes in the market data, therefore letting you easily perform What-if analyses.

How does it work? You create a risk matrix for either of the following—the current instrument in the Single Option page or the current portfolio in the Portfolio page (also known as the strategy).

After defining a strategy in the relevant pricing page you then load it to the Risk Matrix window via the ribbon bar > Trader tab or Structurer tab > Risk Matrix button. The risk matrix is always created for the strategy displayed in the page from which you accessed the Risk Matrix window.

Once you have loaded the strategy to the Risk Matrix window, for the defined valuation date you can then simulate how changes to any one or two of the following market data inputs—spot, volatility surface, IR yield curve and (if relevant) the FX spotNote that the FX spot can only be shifted if the strategy contains one or more instruments for which you have changed the base currency and if you have defined it as a quanto version of that instrument (and not as a composite version). If you do shift the FX spot, the shift in the FX spot has no effect on the premium of the instrument across the risk matrix (this is because this type of instrument uses a predefined FX exchange rate and is therefore not sensitive to exchange rate risk), but does affect the Greeks.1—will affect the position of that strategyIf you choose to only alter one of the supported market data inputs (by setting the other input to None in the Vertical axis), you will receive a one dimensional risk matrix.2. You do this by linking an element to the horizontal axis and, optionally, one to the vertical axis—for more information on how to customize the element to be shifted in the risk matrix, see Customizing the Element to Be Shifted in the Risk Matrix.

It is also important to be aware of the following:

As you can include multiple assets in the Risk Matrix window, this means that you can also create a risk matrix for:

Instruments with multiple underlying assets, e.g., a spread or a crack.

A portfolio where the instruments are based on different assets and/or which contains instruments with multiple underlying assets.

This is useful as it lets you alter different elements of the different assets according to your view of the market. For example, you can shift the spot of one underlying asset and the volatility of a different underlying asset.

As part of the support for multiple assets, you can control whether shifting one of the elements will also affect that same element in all the underlying assets in that strategy, and how. You do this using the Correlation field. For more information on this setting, see Working with the Correlation Setting in the Risk Matrix.

You define the shift for an element for a given reference underlying asset. Subsequently, this shift is then automatically applied by SD across all the contracts/tenors in the relevant curve.

However, you can control how this shift is applied—you do this using the Curve field. For more information on this setting, see Controlling How the Defined Shift Is Applied Across the Curve in the Risk Matrix.

Once you have defined how to shift the market data, when you then calculate the risk matrix, by default the premium is always displayed for each scenario in the risk matrix. In addition, you can also choose which of the following risks you also want to include:

Delta

This result displays the change in an option’s price for a small change in the underlying. In the Risk Matrix this result is displayed as a cash amount (and not in units of the asset).

For the Risk Matrix, for most assets the delta is calculated as follows:

delta forward in units* price of the underlying contract

Where:

The underlying contract can be any of the following—the asset's nearby contract, 3MT contract, front month contract, specific contract, day ahead price, or rolling 3rd future contract.

Which of these underlying contracts is actually used in the delta calculation for each instrument in the strategy depends on the underlying defined for that instrument-in the Underlying dropdown list in the pricing page.

Note that which of the various underlying options are available for each instrument in the pricing page depends on the type of instrument defined and the asset selected.

The delta forward in units is the value displayed in the pricing window as the Delta Future result.

This delta calculation is used in the Risk Matrix for all assets except for OTC base metals where the instrument's underlying is set to spot and for OTC precious metals. For these assets the delta is calculated as delta spot in units * spot.

Gamma

This displays the percentage change in delta for a 1% move in the underlying as a unit of the asset.

Vega

The vega displays the percentage change in option value for a 1% change in volatility based on the ATM vol.

Once you have loaded a strategy from the pricing page to the Risk Matrix window you can then:

Customize the element to be shifted in the risk matrix. See Customizing the Element to Be Shifted in the Risk Matrix.

Manage the correlation between the underlying assets in the strategy. See Working with the Correlation Setting in the Risk Matrix.

Control how the defined shift is applied across the curve. See Controlling How the Defined Shift Is Applied Across the Curve in the Risk Matrix.

Define the valuation date. See Defining the Valuation Date in the Risk Matrix.

Customize the displayed results. See Customizing the Displayed Results in the Risk Matrix.

For a list of the buttons and fields in the Risk Matrix see Table 1.

To create a risk matrix for a strategy: