Main Exposure

The Main Exposure screen allows you to produce a variety of custom exposures on any portfolio loaded in SpanRM. In this view, the risk measures of the individual components of the portfolio are aggregated to measure the total portfolio risk exposure. Using the controls on the form, the user sets ranges and increments for the risk sensitivities he or she wishes to display in the matrix.

1 Using the Controls
2 Notes

The Main Exposure screen can be accessed in one of two ways:

1) highlight the portfolio on the tree and click on the 'Analyze' button on the toolbar

, or

2)right-click on the portfolio and choosing Analyze from the menu, as in Figure 1.2.

Figure 1.2

The user is presented with a screen like the one shown in Figure 1.3.

Figure 1.3

The data shown in the matrix (bottom portion of Figure 1.3) is what will be referred to as the 'exposure'. The exposure screen shows a portfolio's risk measures and dollar exposure to movements in the selected variable of the underlying contract. For example, Figure 1.3 shows different measures of the risk exposure in the price of the S&P500 futures contract. The controls on the top half of the window allow the user to customize the ranges and variables shown in the exposure.

The bolded column in the middle of the exposure indicates the settlement price or, if the price has been changed in the system, the last updated trade price of the underlying.

The price points to the left and to the right of the bolded column are the prices upon which each column's risk measures are based. The controls that are used to determine these increments and ranges will be explained in more detail in subsequent sections of this guide.

Rows in the Exposure

There are eight primary rows in the exposure:

1) Underlying:

Shows the quantity of the underlying product for the selected Combined Commodity.

Filtering Underlying by Series

When a portfolio contains multiple months, or 'Series', for a particular Combined Commodity, you can use the Product drop-down box to filter for a specific Product Series. (Figure 1.6)

Figure 1.6

The Underlying quantity row will display the quantity for that specific Product Series. After choosing a different Product series, you must recalculate by clicking 'Calculate Risk', or hit the enter key on your keyboard. This allows you to view the risk of the portfolio by individual quarterly expiration buckets independent of the total portfolio.

2) Option Delta (Opt.Delta)

This row displays the aggregate sum of the option deltas for the combined commodity being analyzed. The option delta shows the change in the value of the options for a change in the value of the underlying price. As you look across this row, you can see the change in the net delta as the price of the underlying changes. For example, in Figure 1.4, the net option delta at the futures price of 1147.20 is 55.1619, and, looking 2 columns to the right at a futures price of 1157.20, the net option delta is 56.0493.

Also, by using the 'Product' drop-down box, you can filter for net delta by individual Product Series.

Filtering Delta by Series

When there are more than one Product Series in the portfolio for the chosen Combined Commodity, and the Product drop-down box is used to filter for a specific Product Series, the Opt.Delta row will display the net delta for that specific Product Series only.

3) Net Delta

Net Delta is the sum of Underlying and Option Delta.

4) Gamma

Gamma is the change in an option's delta (or portfolio of option deltas) for a one-unit change in the price of the underlying. This row displays the aggregate sum of the gammas for the combined commodity being analyzed.

5) Vega

Vega is the change in the value of an option or portfolio of options for a 1 percentage point increase in implied volatility.

6) Theta

Theta is the rate of decay in the time value of an option or portfolio of options . It is usually expressed as the change in the value of an option for one day’s passage of time.

7) Rho

Rho is the change in the value of an option for a 1 percentage point increase in interest rates.

8) Risk

The numbers in the risk row represent the theoretical gain or loss calculated using the incremented price of the underlying against the settlement price.

*Important note on Index-based and Yield-based implied volatility

For short-term interest rate contracts that are priced at 100 minus the yield, such as the CME's Eurodollar, Span RiskManager internally stores implied volatilities as 'Index-based' (based on the implied volatility of the underlying price), as opposed to 'Yield-based' (the implied volatility based on the yield derived from that price (100 minus the underlying price). For example, with Eurodollar futures at 98.04, a 98 call option may have a 'yield-based' implied volatility of 28% . The 'Index-based' implied volatility equating to 28% would be .0056. This is calculated as [implied vol * yield] / Index price. You can set Span RiskManager to display either yield-based or index-based vols for add-on type interest rate contracts in the Preferences section.

Using the Controls

Option Pricing Models

The Option Pricing Model drop-down allows you to easily switch between one of 4 different option pricing models. To change models, simply choose a model from the list and click on 'Calculate Risk'.

Main Variable

The 'Main Variable' controls which sensitivity factor (Price, Time to Expiration, Volatility, Interest Rate, or Dividend Yield) will be analyzed and displayed horizontally across the exposure. Price is the factor that is most often used in these types of analyses but the other factors can be used as the Main Variable to pinpoint any kind of risk.

Figure 1.7 shows an example of the exposure using Implied Volatility as the Main Variable. It shows the Option Delta and risk of this portfolio recalculated down 2 vols, 4 vols, and 6 vols; and up 2,4,and 6 vols from the base volatility.

Secondary Variable

Use the Secondary Variable in conjunction with the main variable to gauge the effects of changes in price, implied volatility, time to expiration, interest rates or dividend yield with changes in the Main Variable. The Secondary Variable allows the user to gauge the effects of two variables changing at the same time. For example, Figure 1.8 shows the risk on a portfolio of S&P futures and options with the price of the underlying moving in increments of 5 points and implied volatility increasing and decreasing by 4 vols (in 2 increments).

You can use the scroll bar to see the effects of increases and decreases in implied volatility in conjunction with increases and decreases in the price of the underlying.