Kamakura’s industry leading credit risk analytics were first released in production form in May, 2000. Kamakura’s risk management software clients now for the first time can perform key risk management tasks in one piece of software with one data base, one graphic user interface and one set of analytical libraries:
- Calculate default probabilities and expected losses for sovereigns and municipalities
- Corporations and other issuers of equity and debt securities
- Calculate credit-adjusted, option-adjusted value
- Calculate credit-adjusted, option-adjusted value at risk
- Calculate credit-adjusted, option-adjusted hedges for credit, market and interest rate risk
- Calculate credit-adjusted net income simulation
- Stress test all risk measures for changes in any risk factor, including credit risk
- Credit-adjusted transfer pricing
Kamakura Risk Manager (KRM) uses a solid analytical foundation with six yield curve smoothing methods and five different term structure models for valuation, pricing, and hedging of a wide range of equity securities, fixed income securities, foreign exchange contracts. KRM also delivers an unmatched list of derivatives and exotics.
The KRM features the following key extensions of Kamakura's industry-leading analytics:
- Implements Robert Jarrow’s reduced form model of credit risk with a time dependent default intensity
- Utilizes observable debt prices to imply both default intensity and market liquidity’s impact on observable credit spreads for sovereigns, corporations and other issuers of debt. Counterparties who are not themselves issuers of debt are modeled using another credit as a benchmark for their credit risk. Their default may or may not be correlated with the benchmark.
- Recognizes that the liquidity of the debt markets and the equity markets impact market prices and that this impact should not be mistaken for a change in default probabilities
- Introduces a seventh KRM yield curve smoothing method, maximum smoothness credit spread smoothing. Maximum smoothness credit spread smoothing, along with the Jarrow liquidity adjustment, reveals expected losses implied by debt prices with great clarity
- Models credit-adjusted value at risk with the true “two humped” probability distribution that results when issuers of debt are truly in distress.
- Shows the impact of default on value at risk, even with diversification, in a way that makes clear why there are fat “tails” in the true loss distribution.
- Produces default probabilities without reliance on unobservable factors like “the expected return on the market portfolio” or the correlation between two unobservable variables (both of which are necessary in using the Merton model to calculate default probabilities)
- Provides true credit-adjusted mark to market gains or losses and expected losses, not just replacement cost times the expected loss given default