Kamakura Risk Manager KRM-tp

Multi-Currency Credit and Option-Adjusted Transfer Pricing

Kamakura Risk Manager-Transfer Pricing (KRM-tp) was released in early summer 2001. KRM-tp shares the principal attributes of the other modules in the KRM family:

• The same graphic user interface
• The same ODBC data base design
• The same financial analytics
• The same multi-currency term-structure model-based approach
• The same credit default modeling and valuation approach

KRM-tp’s design is rooted in the 25 year involvement of senior management at Kamakura in transfer pricing issues, beginning with Don van Deventer’s introduction to the subject at Bank of America (PDF available: Transfer Pricing System Design: Building Clarity in the Responsibility for and Measurement of Risk)  in 1974 while working for Mack Terry, the father of the transfer pricing discipline in banking. Dr. van Deventer and Dr. Dennis Uyemura wrote about the conceptual aspects of the transfer pricing discipline in their popular book Financial Risk Management in Banking.

KRM-tp is the first transfer pricing module in the industry to offer full option-adjusted transfer pricing, with arbitrary degrees of consumer “rationality,” all done on a multi-currency basis. KRM-tp allows for multiple transfer pricing centers and for a separate “ALCO book” and “irrationality book” for that part of the organization which takes the risk of consumer option exercise. KRM-tp also allows for a “credit risk book” that is fully consistent with the default probabilities and credit adjusted valuations of the Kamakura credit module KRM-cr.

• Traditional transfer prices without consideration of optionality
• Credit-adjusted transfer prices reflecting true borrower credit spread
• Option-adjusted transfer prices with fully rational consumer behavior
• Option-adjusted transfer prices with partially rational consumer behavior
• Net income simulation for each transfer pricing book using KRM-ni, Kamakura’s stochastic net income simulation module
• Full mark-to-market of the transfer pricing books using the analytics of Kamakura’s mark-to-market module KRM-mv
• Multi-currency option-adjusted value at risk using Kamakura’s var module KRM-var
• Multi-currency option-adjusted stress-testing using KRM-mv
• Full credit adjusted valuation using the Kamakura credit module KRM-cr
• Default probability estimation for borrowers using KRM-cr
• Transfer pricing of non-maturity assets and liabilities using the analytics of Kamakura’s non-maturity valuation module KRM-dc
• KRM-tp produces many standard reports that can be exported to Excel or web pages using the Crystal Reports reporting tool
  • Business unit net income, both matched maturity basis and regular
  • Business unit mark to market “equity”, both matched maturity and regular
  • Business unit value at risk, both matched maturity and regular
  • Transfer pricing unit net income, both matched maturity basis and regular
  • Transfer pricing unit mark to market “equity”, both matched maturity and regular
  • Transfer pricing unit value at risk, both matched maturity and regular
  • Total bank net income, both matched maturity basis and regular
  • Total bank mark to market “equity”, both matched maturity and regular
  • Total bank value at risk, both matched maturity and regular
  • Credit-spread based
  • Net income
  • Mark-to-market valuation
  • Value at risk
  • For each business unit, the transfer pricing unit, the credit unit, and the total bank
  • Drill-down display of credit spread and transfer price for every asset and liability
  • Summary credit spread and transfer price for each business unit and product

New Developments in Transfer Pricing

Kamakura Corporation has consulted with major financial institutions around the world on transfer pricing and pushing forward the state of the art. Kamakura’s transfer pricing clients range in size from $6 billion in assets to $500 billion in assets. The transfer pricing field is changing rapidly and the most exciting developments include the following topics:

• Credit-adjusted transfer pricing
• Internal credit derivatives
• Option-adjusted transfer pricing

Kamakura’s work in this area is proprietary but we would be pleased to share it with potential clients. For more information, please contact sales@kamakuraco.com.

Real-time Live Web Video Demo

For a real time live web video demo of Kamakura’s transfer pricing module KRM-tp, please contact sales@kamakuraco.com.

History of Transfer Pricing

For a history of the transfer pricing function in commercial banking, please visit the Kamakura research page and download this PDF file from the public working paper section:

Donald R. van Deventer, “Transfer Pricing Systems Design: Building Clarity in Risk Measurement and Risk Responsibility,” January, 2002

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