Regulatory and internal model validation services from CompatibL
Figure 11
Trade
Vanilla swap portfolio consists of 50 USD interest rate swaps; fixed coupons (2%) paid semi-annually, floating coupons paid quarterly.
Cross currency swap portfolio consists of 50 cross-currency rate swaps; fixed EUR coupons (3%) paid semi-annually, floating USD coupons paid quarterly.
Model
Scenarios computed by uncorrelated Hull-White models for the interest rates, with the initial USD and EUR yield curves flat at 2% and 1%, respectively, Gaussian (basis point) volatilities of 1%, and mean reversion speeds of 5%. The exchange rate is log-normal, with USD/EUR spot at 1.2 and a constant FX diffusion volatility of 10%.
Note: as the FX rate has random drift (due to the volatility of the USD and EUR interest rates), the implied FX volatility is, of course, larger than the diffusion volatility.
Exposure
Expected exposures are computed by brute-force daily simulation using Conservative calibration with and without initial margin protection. The margin agreement uses daily margin transfers, no thresholds, and no MTA/rounding. The initial margin level is estimated using 10-day model VaR. It is further assumed that no initial margin is returned to the counterparty during MPR.