Using MATLAB for Risk Modelling: Two Practical Applications

In this session, Gary and Evi present two applications of using MATLAB for risk modelling: Incremental Risk Charge (IRC) and HSBC's De-peg Risk Measure (DPRM).

IRC is a regulatory capital model required to capture default and credit migration risk in the trading book. HSBC has had an approved IRC model since 2008; however, some enhancements were required for Basel III rules for the trading book that came into force at the end of 2011. MATLAB was used to build a replica of the model in production, which was then used to research the necessary enhancements. The MATLAB model is now often used for analysis of production results and for what-if analysis. The presentation discusses the IRC model requirements, MATLAB implementation, and experimentation with GPU technology to enhance performance.

The DPRM model calculates the capital requirement for the risk of the peg to be abolished or the regime to change. For certain currencies (pegged or heavily managed), the spot exchange rate is pegged at a fixed rate (typically to USD) or managed within a predefined band around a pegged rate. Historic FX rate scenarios for pegged or managed currencies typically display low volatility; therefore, a VaR measure calculated using historical movements will be understated as it does not reflect the risk of a peg break and change in currency regime. The purpose of the DPRM described in this presentation is to capture the risk of peg break and generate the appropriate capital requirement through the capital add-on calculation. MATLAB is used to build the model, and the application is shared with the Market Risk Control and Market Risk Managers using MATLAB Compiler™.