Risk Management Modelling and Validation

By: Intedelta  06-Dec-2011
Keywords: Financial Institutions

Models are central to risk and pricing environments. We have experience of building, selecting and validating models in a wide variety of areas.

Our modelling expertise covers: 

  • Pricing (from vanilla to exotic products across all asset classes: e.g. rates, FX, credit and equity)
  • Market and credit risk for derivatives and security positions (e.g. VaR, Potential Future Exposure, CVA)
  • Ratings
  • Basel: PD, LGD, EAD, regulatory capital under Internal Model Method. We have experience across most asset classes: retail, SME, corporate and financial institutions
  • Economic capital
  • Stress testing

Within these areas we provide a range of services, described below.

Model development

We can write customised pricing and risk models for general or for specific derivative instruments and structures. The models may produce theoretical values, first and second order greeks, VaR, potential future exposure, CVA, etc. Models can be written in C, C++, C# or VBA. Clients are provided not only with a working solution but also the code in the form of a buildable project, extensive documentation and a full test suite.

Model package selection

Many clients choose to buy an “off-the-shelf” package to solve their modelling requirements rather than building in-house. We have in-depth knowledge of model vendors. We do not believe there is a one-size fits all best package. The most suitable package for a client depends on the products they wish to cover, the potential extensibility of both the models and their business, their sophistication level and how they will use the results of the models.

Model implementation

As derivatives get more complicated and the research of financial mathematics gets more complex, solutions to modelling requirements can also be extremely complicated. In all but the most simple cases, the days of turn-key modelling solutions are gone. Most model packages require an investment in time and expertise to get the best out of them. 

Model choice best practice

As the boundaries of financial mathematics have been further expanded, different methods can now be used to model the same structure. Take, as an example, a simple barrier option. One could price this using (i) single-volatility Black-Scholes, (ii) two-volatility Black-Scholes, (iii) local volatility, (iv) Merton jump diffusion, (v) stochastic volatility etc.  There is no such thing as the right model for a product. The most suitable model of a product depends on the clients’ business: why they are pricing the product, what risks are they are aiming to identify and capture, and how they might hedge the product. We can advise on best market practice in the context of their business – helping choose the models which will provide the correct blend of sophistication and efficiency.

Model validation

As regulatory regimes regarding derivatives become more stringent, the validation of models being used by firms has become a key area for scrutiny. We can provide independent, thorough and fully-documented validation of models and the implementation of such models.

We have a rigorous methodology for the validation of models. Alternatively, we can adhere to clients’ own model validation policies and standards. 

Keywords: Financial Institutions

Other products and services from Intedelta


Risk Management Consultancy Services | InteDelta

This over-arching delivery approach for the particular service has then been further developed specifically to take into account the particular needs of subject matter areas within the broader risk management domain (e.g. CVA, Counterparty Risk, Collateral Management). We have developed industry proven tools to support our clients in delivery of best practice. We have developed a structured delivery approach.


Risk Management Market Intelligence | InteDelta

We have an established methodology for the conduct of market intelligence which has proven value in obtaining the answers clients need whilst respecting the confidentiality of the survey participants. We believe that the ability to fully interpret interviewees’ answers and to ask pertinent supplementary questions are essential to obtaining the most from a study.


Collateral Management Target Operating Model

Split of collateral management responsibilities between operation teams, risk teams and front office teams (e.g. front office inventory management, collateral trading, CVA teams etc. The ways in which financial institutions organise their collateral management functions and define their collateral management processes are also undergoing significant change.


Risk and Collateral Organisational Change and Business Re-Engineering

This defines elements such as which departments have responsibility and ownership for each process step; the appropriate independence of key functions/controls; and ensures departmental skills are appropriately matched to the required processes to be undertaken.


Risk Management Technology Consultancy | InteDelta

With this in mind, we have designed a series of services which are aimed at helping financial institutions implement best risk management practice from a technology perspective within optimal timeframes. Successful investment in risk technology programmes is one of the major determinants of firms achieving best practice within the area of risk management.


Risk Management Policy Development and Review

Policies are an important element in enshrining the strategy of a business and in ensuring it is properly controlled. We can draft or review policies in any risk management discipline as well as for many business areas. The types of policy we most frequently encounter are.


Risk Management Training, Risk Management Courses, London UK

In addition to working directly for end clients, InteDelta accepts engagements from training companies to provide content and trainers for courses they are marketing. Whether training is needed as part of a large consulting engagement or on a standalone basis our training is highly customised to client requirements.