Project 1 for Portfolio Management

Feb 3rd, 2012
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New York University
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PRISMA system of Eurex is the new portfolio based margin approach and a new benchmark. It is intended to gradually replace the current margin method (Risk-based Margining). Eurex Clearing Prisma system allows the cross-margining between products as well as across markets clearing by Eurex Clearing. This is especially applied to the interest rate products where cross margining concerns the allocation of positions of listed fixed income products and OTC IRS products in the same liquidiation group, considering the sensitivities of the products to the general level of interest rates. This system is intended to ensures that the reduced risk profile of interest rate hedged portfolios are adequately reflected by lower initial margin requirements.

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Risk and Portfolio ManagementProject #1To: Professor Marco AvellanedaName: Wenchao ChenStudent ID: N17179896Feb 26th, 2014Problem 1. .Useful reference:http://www.eurexclearing.com/blob/clearing-en/160608/305764/17/data/eurex_otc_clear_services_dec_2013.pdf(a) Define Variation Margin.A daily payment of profits and losses (even daily changes of P&L) which is notcollateral.(b) Define Initial Margin.Initial margin is collateral that the holder of a financial instrument has to depositto cover some or all of the credit risk of theircounterparty (most oftentheir broker or an exchange).(c) Summarize in your own words what the PRISMA system of Eurex is intended todo and how they define the margin requirements. (This is a long question: takeyour time).PRISMA system of Eurex is the new portfolio based margin approach and a newbenchmark. It is intended to gradually replace the current margin method(Risk-based Margining). Eurex Clearing Prisma system allows the cross-marginingbetween products as well as across markets clearing by Eurex Clearing. This isespecially applied to the interest rate products where cross margining concerns theallocation of positions of listed fixed income products and OTC IRS products in thesame liquidiation group, considering the sensitivities of the products to the generallevel of interest rates. This system is intended to ensures that the reduced risk profileof interest rate hedged portfolios are adequately reflected by lower in

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