KIS Pricing - Financial Solution

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Multi Factor Vol. Surface

Bond Multi Factor

Improved analytical methodology based on changes in the concept of Return/Risk on bonds

Existing: Analyzing Return / risk of sector / maturity → Focusing on changes in interest rate structure and spreads by credit ratings

Using Key Rate Duration

It is possible to measure not only parallel movement of interest rates, also possible to measure spread movement, curvature and change of specific bond section movement and movement of all interest rate structures.

Consistency to the various portfolio analysis

Analyze by bottom up method which is sum of decomposition results for each items
Gives consistency to various portfolio analysis

Easy comparison between the bond indices and the portfolios

Capability of interpreting bond index as a single bond item by sum of decomposition results for each items in the index.
Simplified comparison between the portfolio and the index

Capability

Analysis of the investment product and Portfolio style

Factor Exposure comparison between portfolio and Bond-Index
Ability to identify/ differentiate investment management style

Portfolio Risk Management

Calculate the variability of factor return by each factor
Estimation of variability of excess return compared to the index (Ex-ante risk)
Portfolio performance risk management with expected distribution of excess returns
By analyzing the variability of excess returns by factor, preemptive risk management is possible

Portfolio performance Analysis

Analyze the source of performance by dividing the profit during the operating period By decomposing each factor of the returns able to display source of the performances
Existing Performance Analysis
- Bond / maturity breakdown is the main analytical structure
- Existence of a gap between the actual investment decision-making process
Factors that contributes to returns can be analyzed (realistic comparison between actual performance and performance analysis)

Reporting and Optimization Portfolio Configuration

Consistent analysis of the entire process (management style, performance, and risk) based on Factor
Objective and reasonable bond management report possible
Factor Optimized portfolio composition can be achieved by placing constrains on the

Volatility Surface

One of the biggest influences on price of ELS / DLS in the market
Prior to using the "Volatility Smile” the single estimated volatility value represented all volatility of the products
To compensate, the estimated volatility value differences between exercise prices the "Volatility Smile” are used.
2005: Developed to reflect institutional investor's management process
2018: Strengthening Web-based user-friendliness and expanding services to customers with diverse platforms
More Sophisticated valuation of ELS / DLS using Vol Surface volatility
Reduces unnecessary operational risk by reducing the gap in operation

Volatility Surface Model

KISP use SABR Model and Log-Normal Mixture Model

SABR Model

Models future forward price and volatility of underlying assets
Estimation possible even with small data set

Log-Normal Mixture Model

Use of mix of multiple Log-Normal models of create models on underlying assets and volatility
Detail representation of volatility surface can be achieved

By using two models, KISP is able to provide a volatility surface model that can be used in the market

inform of OTC option+Listed option=Modeling

Volatility Surface Applied Comparison

Example) SPX 2018-07-30 1YR

Volatility

Price Result (Option Value)

In the case of single volatility, large gap between the value of the option calculated with implied volatility
The value of the option calculated with implied volatility show instability as exercise price rises
By applying KISP Vol surface, value of the option can enhance the value
By applying Vol. Surface, elaborate valuation(pricing) of ELS and DLS can be achieved

inform of Volatility Surface Price Result graph

Limitation SITEMAP KOR

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KIS 채권평가 - Beyond Pricing

Financial Solution