Monday, September 26, 2011

risk system can be front office (KK

KK,

One of my systems was a real time risk monitor. Traders use this same system to book trades, price potential trades, make market, monitor market data, conduct scenario analysis. If this is not front office app, then I don't know what is.

If I don't say this app also handles real time risk, then no one will question it is front office. In fact, trading floor guys told me traders use this app more than any other app.

However, at the heart of this application is real time risk engine. All those "front office" features are built on top of the pricing module in this risk engine.

In another bank I worked, I know a Fixed Income derivative trading app that's responsible for position management, deal pricing, live market data, quote pricing, contract life-cycle event processing -- all front office functionality, but at the heart, this is a risk system. The team is known as "Risk team". In fact, there was no other front office app for these derivatives. This was the only thing traders had. If you call it middle office, then there's nothing front office.

In many derivative systems (including fx options and fx swaps presumably), pricing engine takes center stage in both front and middle office. Derivative traders' first and last job is (i believe) monitoring her open positions/deals and trade according to existing exposures and sensitivities. That's the defining feature of derivative trading.

Experts often say derivatives were created as risk management tools. They reduce risk and introduce risk, too. They are creatures of risk.

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