On August 12, NHC continues the second week of the risk salon program by hosting the event on the topic “first line of defence: front office risk management”. We invited Dmitri Rubisov, the Financial Products Director, to give the closer view of front office risk management. On the panel, we also had Ling Luo from Manulife, Xida Chen from BMO and James Shen from CPPIB.
Dmitri started the presentation with a simple question “why do we need models?” The answer drives the basis of front office, to trade and manage risk. From the trading point, hedging, pricing and calibrating models are main functions of financial models. From the risk management perspective, risk management in front office is considered the first line of defence, ensuring trading activities satisfy risk appetites and regulatory requirements.
Continued with the first class topic, Dimitri further explains the function of Greeks and calculation method in the front office. First, Dimitri introduces the sticky moneyness and sticky strike as they are two methods to calculate option delta. In sticky moneyness, volatility surface reaches the new asset value when the underlying asset changes. Vega is the first derivative with respect to implied volatility. Panel speakers have discussed about the volatility skewness under different scenarios.
Gamma is the first derivative of delta; therefore, it is not as stable as delta since it has been differentiated twice. Dimitri has given a clear understanding of Taylor Series and gamma aggregation when a product includes more than one underlying asset.