FEA Enhances VaRworks Product with Advanced Stress Testing and Market-Risk Scenario B

Financial Engineering Associates (FEA) has released the latest version of its VaRworks product with several new enhancements. VaRworks 4.0 for market risk management and Value at Risk calculation features new stress testing functionality, enabling users to view how industry forecasts, corporate trends and individual choices can affect profits and losses within portfolios.

Offered as a set of Excel spreadsheet add-ins, VaRworks 4.0 also includes a newly added tool for designing shocks and analyzing risk conditions before the market is affected, as well as support for individual equities.

"The advanced stress testing is something that talks to board members a lot more than traditional VaR numbers," says Laurent Birade, global sales manager at FEA. "It's hard to explain what Value at Risk is, but it's easy to explain that if interest rates go up by 20 or 50 basis points, this is what happens to a portfolio." Birade adds that the advanced stress testing was something that clients had been asking for as an addition. FEA was also looking to make its product more user-friendly with the new release and appeal to smaller firms that might have been hesitant to approach FEA previously. "We're trying to dumb down the sophistication and open the doors to accommodate the user," he explains.

The new VaRworks product enables users to track VaR according to individual benchmarks. "Let's say you have ten different stocks in your portfolio and want to find out what the risk is, you'd have to map the risk of that stock to say the S&P 500," says Birade. "But the stocks may not all correlate in any shape or form with any one index, so now you can measure it against a proper risk factor." He explains that users can now specify various indices to measure individual stocks against, such as a technology index for a technology stock or a pharmaceutical index for a pharmaceutical stock.

The calculation of incremental VaR has also been enhanced in the latest version, adds Birade. Rather than having to calculate VaR before an instrument has been added, add the instrument, re-calculate the VaR and subtract the two amounts to get the end VaR number with the addition of the instrument, VaR Delta simplifies the process. "It allows users to apply a formula to the single instruments that is to be added and come up with the added Value at Risk and then add that in. The VaR of this extra instrument may be positive or negative, so users can run scenarios on how to reduce the VaR in real-time," says Birade.