Translation tables

The essential information that the source systems supply to the VaR system is
DEAFs. As discussed in the previous section, it is desirable to decouple the generation
of DEAFs from the specific choice of fundamental assets in the VaR system. A
convenient means of achieving this decoupling is through the use of a ‘translation
table’. This is used to tie the character strings used as asset and quality-credit
identifiers in the source system to the strings used as fundamental-asset identifiers
in the VaR system at run time.
For example, suppose the base currency is USD and the asset in question is a
corporate bond that pays in GBP. The source system might provide DEAFs in
currency GBP and credit quality XYZ_Ltd. The first step in the calculation of the
exposure vector for these DEAFs is to compute their PVs. To compute the PV, we
need to associate the DEAF key GBP-XYZ_Ltd with an appropriate FX rate and
discounting term structure (DTS). The translation table might specify that DEAFs
with this key are assigned to the FX rate GBP and the DTS GBP-AA. The second step
in the calculation of the exposure vector is assignment to appropriate volatility
factors. The translation table might specify that DEAFs with this key are assigned to
the FX volatility for GBP and the VTS GBP-LIBOR.
The translation table might be stored in a relational database table laid out in the
following way:
externalPrimaryKey This key would generally be used to identify the asset in
question. For example, for a currency one might use a standard currency code, e.g.
USD or GBP. Similarly, one might identify an equity position by its symbol, and so
forth.
externalSecondaryKey This key would generally be used to specify discounting
for forward delivery. For example, currency assets could be specified to be discounted
according to government bond, LIBOR, and so forth.
DTSPrimaryKey This key is used to identify asset prices in the asset price table as
well as part of the key for the DTS.
DTSSecondaryKey Secondary key for DTS.
VTSPrimaryKey This key is used to identify asset volatilities in the asset price
volatility table as well as part of the key for the VTS.
VTSSecondaryKey Secondary key for VTS.
A timely example for the need of the translation table comes with the recent
introduction of the Euro. During the transition, many institutions will have deals
denominated in Euros as well as DEM, FRF, and so on. While it may be convenient
to use DEM pricing and discounting, it will generally be desirable to maintain just a
Euro VTS. Thus, for example, it might be desirable to map a deal described as DEMLIBOR
in a source system, to a DEM-Euribor DTS and a Euro-Euribor VTS. This
would result in the table entries shown in Table 6.8.
At this point, it may be worthwhile to point out that available discounting data will
generally be richer than available volatility data. Thus, for example, we might have a
AA discounting curve available, but rely on the RiskMetrics dataset for volatility
information, which covers, at most, two credit-quality ratings.