BISAM Case Study - VIX Cognity Use Cas

1. Cognity Case study
Analyzing Volatility: Assessment of
September 2008 VIX Short in Dollars

2. Cognity Case Study
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The challenges to overcome
Sample Portfolio Risk data as of September 8, 2008
Normal Lens
Fat-tailed Lens

3. Cognity Case Study
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Considering a What If for Hedging & Upside
VIX Index
September 8th
2008 is 22.64
• VIX had not been
above 35 in 5 years
• Goal was to reduce
downside risk
• Considered shorting
an out of the money
call
• Earned a premium
and enhanced
performance

4. Cognity Case Study
Portfolio With What-If Trade
• Short Call VIX option
added to the
portfolio beginning
of September 2008
• Strike Price= 40
• Expiration =
December 17, 2008
• Type: European
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5. Cognity Case Study
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The challenges to overcome
Normal Lens
Fat-tailed Lens
Portfolio Risk with Short Call

6. “Is the short
call really a risk
diversifier?”
Cognity Case Study
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Short Call What-If – ETL Diversifiers
Normal Fat-Tailed

7. “No, it is a risk
contributor”
Cognity Case Study
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Short Call What-If – ETL Contributors
Normal Fat-Tailed

8. Cognity Case Study
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One Month Later
VIX Index
Closed October 8, 2008 at 57.53
Closed September 8, 2008 at 22.64

9. • Long Call VIX option
added to the
portfolio beginning
of September 2008
• Strike Price= 40
• Expiration =
December 17, 2008
• Type: European
Cognity Case Study
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Portfolio with Long Call

10. Cognity Case Study
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Portfolio with What-If Long Call
ETL @ 9% Var @ 99% ETR @ 99% Standard Dev
Long 5.89 5.37 53.57 6.67
Hold 10.86 5.41 9.38 3.07
Short 54.47 14.91 7.81 6.30

11. Cognity Case Study
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Long Call What-If – ETR Contributors
Normal Fat-Tailed

12. “Portfolio
analytics based
on normal
distributions
do not provide
the insight
needed for
sound what-if
decisions.”
Cognity Case Study
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Lack of Tail Insight Hurts Performance
Distribution Type Normal
Market Risk Horizon 1 Month
Data Frequency Daily
Evaluation Date 8-Sep-08
Historical Time Window 400 days
Dependancy Structure EWMA - Decay = 0.94
GARCH No
Mean Revision Process Yes
What If September 8, 2008 Change % Change
Original Portfolio $223mm
October 8, 2008
Traditional Analytics
- Normal Short Call
$145mm -$78mm -35%

13. “Cognity Fat-
tailed view
offers precise
view into tail
dynamics.”
Cognity Case Study
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Tail Insights Avoid Large Loss
Distribution Type Normal
Market Risk Horizon 1 Month
Data Frequency Daily
Evaluation Date 8-Sep-08
Historical Time Window 400 days
Dependancy Structure Fat-tailed Copula
GARCH Yes
Mean Revision Process Yes
What If September 8, 2008 Change % Change
Original Portfolio $223mm
October 8, 2008
Traditional Analytics
- Normal Short Call
$145mm -$78mm -35%
Hold $198mm -$25mm -11%

14. “Cognity fat-
tailed view
uncovers new
opportunities
and upside
potential.”
Cognity Case Study
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Precise Tail Insight Improves Performance
What If September 8, 2008 Change % Change
Original Portfolio $223mm
October 8, 2008
Traditional Analytics
- Normal Short Call
$145mm -$78mm -35%
Hold $198mm -$25mm -11%
Cognity -
Fat-tailed Long*
$250mm +$27mm +10%
Performance
40%
+
* Includes est. 3% cost deduction of initial call price

15. Adaptive Risk Analytics
Cognity, part of BISAM's suite of market-leading
portfolio analytics, is a comprehensive, multi-asset
class market risk solution for multi-factor modeling,
risk budgeting & portfolio construction, stress-
testing and real world fat-tail risk measurement.
www.bisam.com/cognity
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