Defining Cash Flow at Risk Types

You use this function to define your Cash Flow at Risk types. In a Cash Flow at Risk type, you store information for Cash Flow at Risk calculations.

Prerequisites

You need to define the volatility types and correlation types in Customizing under Start of the navigation path Treasury and Risk Management Next navigation step Basic Functions Market Data Management Master Data Statistical Data End of the navigation path :

Define Volatility Type
Define Correlation Type

Procedure

Start the function either in Customizing under Market Risk Analyzer Cash Flow at Risk Define Cash Flow at Risk Type or in the application menu under Market Risk Analyzer Evaluation Control Valuation Settings Define Cash Flow at Risk Type (transaction S_EIS_72000137).
Choose New Entries.
Enter a three-character ID for the CFaR type.
Enter a description for the CFaR type.
Choose the CFaR category.
The following selections are possible:
- 0 Simulation
- 1 Variance/Covariance
Under General Settings, make the following settings:
- Confidence Level
  The confidence level represents the probability (in percent) that the deviation of the actual future cash flow from the planned cash flow will not exceed the Cash Flow at Risk.
- Volatility Type
  The volatility type is an entity that is used to classify volatilities. For each volatility type, volatilities for user-defined underlying transactions such as exchange rates, reference interest rates, security classes, or share index volatilities can be stored in the system. Further descriptive parameters are linked to the volatility type.
- Correlation Type
  Specifying the correlation type is optional. If you do not specify a correlation type, Cash Flow at Risk is calculated without considering any correlations.
- Position Calculation
  Here you specify whether transactions are valued completely, or whether an approximation is made (delta, delta-gamma). The method influences the length of the runtime for the evaluation.
  - Full Valuation gives accurate results, but can lead to long runtimes.
  An approximation can be used for linear instruments, which gives the same degree of accuracy but with shorter runtimes. The following options are available:
  - Delta Positions
  - Delta and Gamma Positions
  Note: For the Cash Flow at Risk category Variance/Covariance, only the settings "Delta Positions" and "Delta/Gamma Positions" are permitted.
- Calendar ID
The settings for simulation are relevant only for the Cash Flow at Risk category "Simulation":
- Simulation Category
  You can select the following calculation methods for generating normally distributed random numbers:
  - 01 Structurized Monte Carlo with Box-Muller Alg. for Gen. NDRN
  - 02 Structurized Monte Carlo with Tree Method for Gen. NDRN
  - 03 Structurized Monte Carlo with Strata-Gems Alg. for Gen. NDRN
- Initial Value
  Initial value for the generation of random numbers.
  - If you specify a value, evaluations that are started with identical input parameters lead to the same result.
  - If you do not specify a value, the start value for the random number generator itself is chosen randomly, and different evaluations with identical input parameters lead to different results.
- Simulation Runs
  This is the number of simulation runs (random walks) for the Monte Carlo simulation.
  
  Note
  A higher number of simulations leads to increased accuracy of the result, but also to a longer runtime of the simulation.
  
  End of the note.
- Time Grid
  This setting controls how the time grid of the random walk is created.
  
  The following options are available:
  - Increment by Fixed Number of Days: Each step of the random walk covers the same number of working days (depending on the calendar assigned). The number of days is specified in the "Step Size" field.
  - Use Maturity Band Key Dates as Time Grid: One random walk step is created for each period of the maturity band that is used in the evaluation run.
    In this case, the "Step Size" field is irrelevant, as the length of the steps is variable and depends on the maturity band.
  Dependencies:
  
  The smaller the step size you choose, the more realistic the random walk you obtain, but also the longer the program runtime because more steps have to be created. Conversely, using a larger step size or selecting the "Maturity Band" setting leads to a more coarse random walk but improved performance.
- Step Size
  The number of working days per step of a random walk.
  
  Dependencies
  
  This setting is only relevant if you choose the time grid method Increment by Fixed Number of Days. The smaller the step size you choose, the more realistic the random walk you obtain, but also the longer the program runtime because more steps have to be created. Conversely, using a larger step size leads to a more coarse random walk but improved performance.
- CFaR Method
  The CFaR method controls how Cash Flow at Risk is calculated based on a simulated profit and loss distribution. The following settings are available:
  - CFaR Determination Based on Profit and Loss
    The profits and losses are sorted and counted according to the confidence level.
  - CFaR Determination Based on Symmetrical P+L Distribution
    Before counting, the profit and loss distribution is made symmetrical by including an additional entry with the opposite sign for each existing entry.
  - CFaR Determination Based on Normal Distribution Assumption
    The standard deviation of the profits and losses is calculated, and the CFaR is determined based on the standard deviation and the confidence level.
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