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Risk-neutral scenarios for valuation

Risk-neutral scenarios: for valuing financial options

Risk-neutral valuation techniques are the standard in the financial industry to determine the market value of financial options. Ortec Finance provides risk-neutral scenarios for accurate, fast and robust valuations of profit sharing and return guarantees in insurance products. Ortec Finance unburdens insurance companies by delivering calibrated risk-neutral scenarios with a state of the art risk-neutral Economic Scenario Generator (ESG), expert support and required documentation.

Our calibrated risk-neutral scenarios are highly accurate for prevailing market conditions, including skews and smiles in implied volatility surfaces.

Outstanding risk-neutral models

The risk-neutral scenarios of Ortec Finance at each point in time reflect a highly accurate fit of the prevailing market conditions, including the skews and smiles in implied volatility surfaces. This contributes to the accuracy of the valuations that are performed with the scenarios. Our risk-neutral scenarios also allow for fast valuations due to the good convergence properties. As a result of these good conversions, the evaluation calls for fewer scenarios. Only a small number of Monte Carlo simulations are necessary, because of the demanding calculations in the actuarial systems used by insurance companies to perform the valuations. Moreover, the robustness of the selected models supports reliable and stable valuation results over time. Besides risk-neutral scenarios, Ortec Finance also provides realistic real world scenarios for investment decision making and risk management purposes (read more in section 7 of our white paper “Ortec Finance scenario approach”).

The good convergence properties of our risk-neutral scenarios allow for fast valuations to support demanding calculations in actuarial systems.

A powerful risk-neutral scenario generator

The calibrated risk-neutral scenarios of Ortec Finance are generated with a powerful risk-neutral Economic Scenario Generator (ESG) which is a module of GLASS, just like the DSG for the real world scenarios of OFS. This module generates risk-neutral scenarios for monthly market conditions. It allows the user to construct risk-neutral scenarios based on shocked market conditions, to be able to calculate the necessary sensitivities of option values. Examples include the UP and DOWN interest rate shocks under Solvency II. The risk-neutral scenarios can either be used within GLASS or be exported to proprietary valuation models of insurance companies.

Our powerful risk-neutral Economic Scenario Generator (ESG), expert support, and required documentation, unburden insurance companies.

Key Features

  • Accurate valuations: excellent fit to prevailing market conditions, including skews and smiles in volatility surfaces, and accurate replication of martingale properties;
  • Fast valuations: due to good convergence properties only a small number of Monte Carlo simulations are needed;
  • Robust valuation results: the robustness of the selected models supports reliable and stable valuation results over time;
  • Coverage: wide coverage of assets and regions, and tailoring to client specific needs;
  • Integrated solution: risk-neutral and real-world ESG modules integrated in GLASS for risk management applications;
  • Internal models: export facilities to use scenarios in internal valuation models;
  • Rooted in academic research: good convergence properties and fast, reliable and stable results based on academic research;
  • Continuous improvement: continuously tested and improved based on practical experience and academic research.

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GLASS

GLASS is an asset and liability scenario solution that improves financial decision making by simulating the short and long-term effects of strategic investment decisions.