When defining a strategy, it is useful to know what would happen to its calculated results across different market data and/or time horizon scenarios. For example, you may want to know how changes in the yield curve and changes in the swaption volatility surfaces will affect the market price and risk parameters of a swaption.
The Scenario Tool lets you easily calculate multiple scenarios of a single strategy—an instrument or a portfolio—simultaneously. That is, by letting you see at a glance how shifting up to three different variables (or input data parameters) will affect the strategy’s results (if all other deal configuration data remains the same), the tool lets you easily perform What-if analyses, letting you plan your strategies in a risk-free environment and meet regulatory requirements.
How do you access it? After defining and calculating a strategy in the relevant pricing page, you can then load it into the Scenario Tool. You do this from the ribbon bar in the Trader tab, the Structurer tab or the Risk Mgmt tab and, from the Portfolio page only in the Sales tab—by clicking the Scenario Tool button.
In the Scenario Tool itself you then choose which variables to shift using the Horizontal, Vertical and 3rd Dimension dropdown lists.
Using the Horizontal, Vertical and 3rd Dimension dropdown list you can choose to shift the following variables:
Curves
This option shifts both the yield curve and the OIS curve.
Yield Curve
This option only shifts the yield curve.
OIS Curve
This option only shifts the OIS curve.
Volatility
This option shifts both the swaption volatility surface and the cap/floor volatility surface.
Cap/Floor Volatility
This option only shifts the cap/floor volatility surface.
Swaption Volatility
This option only shifts the swaption volatility surface.
Time Horizon
This option shifts the valuation date, so that each scenario has a different future valuation date. The current strategy is then calculated for each of the defined future valuation dates.
In order to carry out these calculations, the system needs to make assumptions about the projected market data on each of those future valuation dates. Currently by default the forward spot method is supported—in this method the assumption is that the projected market data on each of the future valuation dates will be the same as the live market data on the current date at the time the scenarios are generated1. So, for example, the 5y swap rate on each future valuation date (e.g., in 1 month, 2 months and 3 months) will be set to the 5y swap rate observed at the time the scenarios are generated, etc.
In order to calculate these results, SD uses the market rates for the cut off time selected in the Cut Off dropdown list in the Scenario Tool. By default this is set to the cut off time selected in the Cut Off dropdown list in the pricing page from which you opened the Scenario Tool.
More detailed instructions for how to work in this window will be available shortly.
For each variable you can define:
The size of the steps. You do this using the Steps of dropdown list.
The number of steps. You do this using the # of steps dropdown list.