ORE User Guide Quaternion Risk Management 28 May 2019 1 Document History Date Author Comment 7 October 2016 Quaternion initial release 28 April 2017 Quaternion updates for release 2 7 December 2017 Quaternion updates for release 3 28 May 2019 Quaternion updates for release 4 2 Contents 1 Introduction 8 2 Release Notes 10 3 ORE Data Flow 12 4 Getting and Building ORE 13 4.1 ORE Releases ................................. 13 4.2 Building ORE ................................. 14 4.2.1 Git ................................... 15 4.2.2 Boost ................................. 15 4.2.3 ORE Libraries and Application ................... 16 4.3 Python and Jupyter ............................. 19 5 Examples 20 5.1 Interest Rate Swap Exposure, Flat Market ................. 21 5.2 Interest Rate Swap Exposure, Realistic Market ............... 23 5.3 European Swaption Exposure ........................ 24 5.4 Bermudan Swaption Exposure ........................ 24 5.5 Callable Swap Exposure ........................... 25 5.6 Cap/Floor Exposure ............................. 25 5.7 FX Forward and FX Option Exposure ................... 26 5.8 Cross Currency Swap Exposure, without FX Reset ............ 28 5.9 Cross Currency Swap Exposure, with FX Reset .............. 28 5.10 Netting Set, Collateral, XVAs, XVA Allocation .............. 29 5.11 Basel Exposure Measures ........................... 33 5.12 Long Term Simulation with Horizon Shift ................. 34 5.13 Dynamic Initial Margin and MVA ...................... 34 5.14 Minimal Market Data Setup ......................... 36 5.15 Sensitivity Analysis, Stress Testing and Parametric Value-at-Risk .... 37 5.16 Equity Derivatives Exposure ......................... 40 5.17 Inflation Swap Exposures ........................... 41 5.18 Bonds and Amortisation Structures ..................... 42 5.19 Swaption Pricing with Smile ......................... 43 5.20 Credit Default Swap Pricing ......................... 43 5.21 CMS and CMS Cap/Floor Pricing ...................... 43 5.22 Option Sensitivity Analysis with Smile ................... 43 5.23 FRA and Average OIS Exposure ...................... 44 5.24 Commodity Forward and Option ...................... 44 5.25 CMS Spread with (Digital) Cap/Floor ................... 45 5.26 Bootstrap Consistency ............................ 45 5.27 BMA Basis Swap ............................... 45 5.28 Discount Ratio Curves ............................ 46 5.29 Curve Building using Fixed vs. Float Cross Currency Helpers ...... 46 3 6 Launchers and Visualisation 47 6.1 Jupyter .................................... 47 6.2 Calc ...................................... 47 6.3 Excel ...................................... 48 7 Parametrisation 48 7.1 Master Input File: ore.xml ......................... 49 7.1.1 Setup ................................. 49 7.1.2 Markets ................................ 50 7.1.3 Analytics ............................... 50 7.2 Market: todaysmarket.xml ......................... 59 7.2.1 Discounting Curves .......................... 60 7.2.2 Index Curves ............................. 60 7.2.3 Yield Curves ............................. 61 7.2.4 Swap Index Curves .......................... 61 7.2.5 FX Spot ................................ 62 7.2.6 FX Volatilities ............................ 62 7.2.7 Swaption Volatilities ......................... 63 7.2.8 Cap/Floor Volatilities ........................ 63 7.2.9 Default Curves ............................ 64 7.2.10 Securities ............................... 64 7.2.11 Equity Curves ............................. 64 7.2.12 Equity Volatilities ........................... 65 7.2.13 Inflation Index Curves ........................ 65 7.2.14 Inflation Cap/Floor Price Surfaces ................. 66 7.2.15 CDS Volatility Structures ...................... 66 7.2.16 Base Correlation Structures ..................... 66 7.2.17 Correlation Structures ........................ 67 7.2.18 Market Configurations ........................ 67 7.3 Pricing Engines: pricingengine.xml .................... 68 7.4 Simulation: simulation.xml ........................ 71 7.4.1 Parameters .............................. 71 7.4.2 Model ................................. 72 7.4.3 Market ................................. 78 7.5 Sensitivity Analysis: sensitivity.xml ................... 81 7.6 Stress Scenario Analysis: stressconfig.xml ................ 84 7.7 Curves: curveconfig.xml .......................... 85 7.7.1 Yield Curves ............................. 86 7.7.2 Default Curves ............................ 92 7.7.3 Swaption Volatility Structures .................... 93 7.7.4 Cap/Floor Volatility Structures ................... 93 7.7.5 FX Volatility Structures ....................... 94 7.7.6 Equity Curve Structures ....................... 94 7.7.7 Equity Volatility Structures ..................... 95 7.7.8 Inflation Curves ............................ 95 7.7.9 Inflation Cap/Floor Price Surfaces ................. 97 7.7.10 CDS Volatilities ............................ 98 7.7.11 Base Correlations ........................... 98 7.7.12 FXSpots ................................ 98 4 7.7.13 Securities ............................... 99 7.7.14 Correlations .............................. 99 7.8 Conventions: conventions.xml ....................... 100 7.8.1 Zero Conventions ........................... 100 7.8.2 Deposit Conventions ......................... 101 7.8.3 Future Conventions .......................... 102 7.8.4 FRA Conventions ........................... 102 7.8.5 OIS Conventions ........................... 102 7.8.6 Swap Conventions ........................... 103 7.8.7 Average OIS Conventions ...................... 104 7.8.8 Tenor Basis Swap Conventions .................... 105 7.8.9 Tenor Basis Two Swap Conventions ................. 106 7.8.10 FX Conventions ............................ 107 7.8.11 Cross Currency Basis Swap Conventions .............. 108 7.8.12 Inflation Conventions ......................... 108 7.8.13 CMS Spread Option Conventions .................. 109 8 Trade Data 111 8.1 Envelope .................................... 112 8.2 Trade Specific Data .............................. 112 8.2.1 Swap .................................. 113 8.2.2 Cap/Floor ............................... 113 8.2.3 Forward Rate Agreement ....................... 114 8.2.4 Swaption ................................ 115 8.2.5 FX Forward .............................. 116 8.2.6 FX Swap ............................... 117 8.2.7 FX Option ............................... 118 8.2.8 Equity Option ............................. 118 8.2.9 Equity Forward ............................ 119 8.2.10 Equity Swap .............................. 120 8.2.11 CPI Swap ............................... 120 8.2.12 Year on Year Inflation Swap ..................... 121 8.2.13 Bond .................................. 121 8.2.14 Credit Default Swap ......................... 122 8.2.15 Commodity Option .......................... 123 8.2.16 Commodity Forward ......................... 124 8.3 Trade Components .............................. 125 8.3.1 Option Data .............................. 125 8.3.2 Leg Data and Notionals ....................... 127 8.3.3 Schedule Data (Rules and Dates) .................. 131 8.3.4 Fixed Leg Data and Rates ...................... 134 8.3.5 Floating Leg Data, Spreads, Gearings, Caps and Floors ...... 135 8.3.6 Leg Data with Amortisation Structures ............... 137 8.3.7 CMS Leg Data ............................ 139 8.3.8 CMS Spread Leg Data ........................ 140 8.3.9 Digital CMS Spread Leg Data .................... 141 8.3.10 Equity Leg Data ........................... 142 8.3.11 CPI Leg Data ............................. 144 8.3.12 YY Leg Data ............................. 145 5 8.3.13 ZeroCouponFixed Leg Data ..................... 146 8.4 Allowable Values for Standard Trade Data ................. 148 9 Netting Set Definitions 152 9.1 Uncollateralised Netting Set ......................... 152 9.2 Collateralised Netting Set .......................... 152 10 Market Data 156 10.1 Zero Rate ................................... 157 10.2 Discount Factor ................................ 158 10.3 FX Spot Rate ................................. 158 10.4 FX Forward Rate ............................... 158 10.5 Deposit Rate ................................. 159 10.6 FRA Rate ................................... 160 10.7 Money Market Futures Price ......................... 161 10.8 Swap Rate ................................... 161 10.9 Basis Swap Spread .............................. 162 10.10Cross Currency Basis Swap Spread ..................... 162 10.11CDS Spread .................................. 163 10.12CDS Recovery Rate .............................. 163 10.13Security Recovery Rate ............................ 163 10.14Hazard Rate (Instantaneous Probability of Default) ............ 164 10.15FX Option Implied Volatility ........................ 164 10.16Cap/Floor Implied Volatility ......................... 165 10.17Swaption Implied Volatility ......................... 165 10.18Equity Spot Price ............................... 166 10.19Equity Forward Price ............................. 166 10.20Equity Dividend Yield ............................ 167 10.21Equity Option Implied Volatility ...................... 167 10.22Zero Coupon Inflation Swap Rate ...................... 168 10.23Year on Year Inflation Swap Rate ...................... 168 10.24Zero Coupon Inflation Cap Floor Price ................... 169 10.25Inflation Seasonality Correction Factors ..................