In collaboration with Valu8, we acted for Kempen & Co in validating the valuation and hedging of the Inflation Breaker, a portfolio of ground lease contracts.
The contracts in the portfolio generate monthly cash flows based on the rent. Rents increase annually, with the Dutch pricing inflation index. At maturity of the contract, the tenant has the option, but not the obligation, to buy back the land.
This was not the first time Kempen & Co decided to entrust this validation to Valu8 and Ugly Duckling. This shows that Ugly Duckling is a key player in software, management and finance with an integrated approach that delivers. The work done was a continuation of previous validation work where we checked the cash flow model, the interest rate curve construction methodology and the inflation model. The previous implementation was improved and migrated to Matlab (previously Excel/VBA), which required a new validation.
We have been working on an integration project at ABN AMRO and their subsidiary ABN AMRO Hypotheken Groep. The project requires the migration of mortgages from an obsolete system to a Quantitative Risk Management (QRM) system.
To manage the project effectively we compiled a scenario for a successful migration, based on information gathered throughout the organization. As part of this process, we studied both the current process of funding the mortgage contracts and the process they to which they are migrating. This presented an opportunity to immerse ourselves the funding practices of banks and link these to implementation, i.e. proper engineering.
The migration requires a move from an existing funding methodology to the industry standard of Funds Transfer Pricing [1. see http://en.wikipedia.org/wiki/Funds_Transfer_Pricing for more details on FTP] (FTP). Implementing this needed a conversion methodology. After a literature search we suggested a methodology and implemented it. For the implementation we build a Microsoft Excel/VBA tool to do the relevant computations. Migration of the mortgage contract data from the old system required custom built SQL scripts in combination with the QRM Transaction Data Mart tool. Once the migration is complete all the mortgage information will be stored and processed in one place, reducing operation risk.
We are delighted to be on the steering committee responsible for the Actuarial Association’s new Masters program: Executive Master of Actuarial Science (EMAS).
The Actuarial Association (Actuarieel Genootschap, AG) is the professional association of actuaries and actuarial specialists in the Netherlands, of which very nearly all actuaries are members. The AG has developed into a platform for actuaries to communicate among themselves and with society at large. The committee helps shape the content and context of the course. Managing risk is one of the central themes as is best described by quoting the course website:
The demand for skilled actuarial professionals is growing. Actuaries are the leading professionals in finding ways to manage risk, and managing risk requires knowledge of several disciplines. Understanding how businesses operate, how legislation may have an impact and how financial economics may affect securities are all vital skills for an actuary. Globalization, the integration of financial markets, changing IT environments and market innovation in risk management ensure that the actuary field of action is becoming more challenging and complex by the day. In response to these changes, the Dutch Actuarial Institute (Actuarieel Instituut) and Tias Nimbas Business School (Tias Nimbas) have developed the Executive Master of Actuarial Science (EMAS).
- Taken from the executive master of actuarial science website
After being on the committee in the startup year we are happy to continue our engagement into the second year of the course.
In collaboration with Valu8, we acted for Kempen & Co on a model validation.
In collaboration with Valu8 we performed a model validation for Kempen & relating to the methodology used to valuate and hedge the Inflation Breaker, a portfolio of ground lease contracts. The contracts in the portfolio generate monthly cash flows based on the rent which increase annually with the Dutch pricing inflation index. At maturity of the contract, the tenant has the option, but not the obligation, to buy back the land.
As part of the validation we checked the cash flow model, the interest rate curve construction methodology and the inflation model. Finally, the implementation of the models in Excel/VBA was checked, and the code used to implement the models was validated.
We supported Cardano in validating and optimizing the Excel/VBA code used to model pension rights. Our team successfully completed a first analysis of the raw data.
In the quest for a new sustainable pension contract, two criteria play a crucial role: a minimum level of security and sufficient indexation potential to avoid erosion of pensions by inflation. These two criteria intuitively collide. To gain more insight in these matters, Cardano started an interesting research project which we supported by validating and optimizing the Excel/VBA code used to model pension rights.
We completed our involvement in the project by providing a first analysis of the raw data. Based on the model, Cardano has published a paper ‘Getting Real about Nominal Guarantees’ by Theo Kocken, Bart Oldenkamp and Joeri Potters.
We organized a lecture course for the Actuarial Association focused on the (financial) risks and uncertainties faced by pension funds and insurance companies.
The Actuarial Association (Actuarieel Genootschap, AG) is the professional association of actuaries and actuarial specialists in the Netherlands, of which very nearly all actuaries are members. The AG has developed into a platform for actuaries to communicate among themselves and with society at large. The Association also provides educational services ranging from one day courses to a complete training program to become a licensed actuary.
The lecture course focused on risks actuaries evaluate – estimating the financial size and chance of occurrence, and the impact they have on the fund. Based on this, computation funds can be corrected if necessary. The course uses Hull’s book and covers futures, forwards, interest rates, swaps, options and hedging strategies.
We helped to build a Microsoft Excel Application for a Dutch bank that assisted in the valuation of a portfolio with loans.
The client required tooling that would generate valuation reports of their holdings for accounting purposes. The portfolio had various embedded option features within the foreign loan contracts.
The resulting tool was built using Microsoft Excel extended with Visual Basic for Application. It gathers the required market data from Bloomberg and uses our financial algorithms to produce portfolio valuation reports.