Methodology
Mark-to-Future
At the heart of Algorithmics' suite of solutions is Mark-to-Future, a forward-looking, scenario-based framework that links disparate sources of risk and provides a means for calculating the risk-reward trade-off within a single, unified architecture.
Full integration of enterprise-wide risks
Many well-known financial disasters occurred because of the high correlation between market and credit risk in stress periods. Such occurrences are naturally modeled through scenarios where changes in market conditions trigger changes in credit quality. With Mark-to-Future, all risk types may be integrated within a common enterprise-wide framework.
An inclusive approach
Mark-to-Future scenarios are the drivers of all future uncertainty and become the language of risk within Algorithmics' suite of solutions. Since scenario-based risk can be explained in a straightforward manner, decision makers with varying levels of sophistication can contribute to risk-reward discussions through the focus on plausible scenarios.
A forward-looking framework
Mark-to-Future's scenario-based framework produces risk and reward measures that explicitly capture the passage of time. Consequently, challenging issues such as credit mitigation techniques, portfolio path dependency, settlement and reinvestment, dynamic rebalancing, liquidity and thin market effects can be effectively addressed.
Increase accuracy
Generate scenarios from history, advanced Monte Carlo models or subjective views of the world through Mark-to-Future's use of scenarios. This method is an improvement over purely analytical methodologies that may rely on simplistic assumptions about risk factors.
Compute once, use many times
The realization of Mark-to-Future values across positions, scenarios and time steps determines any risk or reward measure. As a result, the addition of a new position, scenario or time step requires only the simulation of the new values, which are then appended to the previously computed results. Previously simulated results need not be recalculated, and only the calculation of risk or reward measures need be repeated.
Related Information
Mark-to-Future: A Framework for Measuring Risk and Reward
The result of ten years of effort by the risk leaders of Algorithmics, this book describes the practical achievements that began with a vision and evolved into a working reality being implemented in the marketplace.
Real-time Mark-to-Future
Understand how to assess credit exposure accurately in real time.