Financial markets and global politics changed radically after 2008. Events have become much less predictable as evidenced by the BREXIT and the US election surprises. Diminished liquidity makes markets more prone to volatility spikes and cash flow crises. This environment requires a fresh approach to risk management and hedging. At Scoville Risk Partners Advisory, we apply advanced analytical methods to quantify the future performance of proprietary portfolios and hedge overlays.
The benefits are:
- A probabilistic analysis of future cash flows, which allows one to identify potential risk factors not apparent with more traditional approaches. The result is a better indication of the potential loss in worst-case situations, so-called “tail risk”, and a better gauge of the probability that they might occur.
- Using future cash flow analysis, hedge performance can be directly tied to a company’s pro forma and financial metrics — EPS, cash balances, dividend yield, or other metrics that a client holds important. This can facilitate increased transparency in communications with senior management and external analysts.
- Exposure to asset classes or products that are outside of your immediate portfolio but nevertheless have a significant impact on performance can be identified. The potential impact of a large moves in one or many major markets to which you have indirect exposure — whether bond yields, exchange rates, oil prices, or currencies — can be assessed
Our team specializes in understanding a client’s business, identifying the primary drivers of business performance and deploying our analytical framework to make probabilistic assessments of key financial metrics and suggestions for improvements in hedging programs grounded in a rigorous quantitative framework.
- Identification of relevant features of assets and structured hedges.
- Realistic price simulation processes and asset cashflows using current market data.
- Future probabilistic cash flow distributions.
- Hedge performance in stressed scenarios.
- Identification of sources of hedge slippage or mismatch.