Banking & Finance

Risk Management

Buinsberry Risk Management Software Solutions manages financial risk through solutions and services by sound analytics and market research, quantifiable results and by meeting industry regulatory compliances through fully integrated applications and flawless execution.

Buinsberry has partnered with ZSL Kamakura Corporation (kamakuraco.com) based at Honolulu, Hawai for marketing/implementing its Risk Management Products in India. Kamakura Corporation, founded in 1990 with more than 200+ Clients spreads across in 33+ countries, is one of world's leading risk management firms. The firm is one of the pioneers in this domain and most established names in the Risk Management solution providers in the world. The leading Risk Management professionals in the world such as Prof. Robert Jarrow, Dr. Van Devanter etc., are the promoters and leaders of Kamakura.

Suite of Risk Mgt Products include: ALM & FTP, Market Risk, Credit Risk, Economic Capital, Base l II (Std and IRB), Operation Risk, Online PD Calculator, Modeling frame work, Quantitative models, (Merton. Jarrow, Hybrid etc).

Enterprise Risk Management Software(KRM)

Kamakura Risk Manager

Kamakura Risk Manager (KRM), first sold commercially in 1993, is a fully integrated enterprise risk management system that combines asset and liability management, credit portfolio management, market risk management, operation risk, Basel II and other capital allocation technologies, transfer pricing, and performance measurement.

All major branches of risk management are dependent on the same core analytics techniques. Kamakura recognized this in 1993 when our strategic partner ZSL launched the company as the world's first vendor to provide a fully integrated enterprise risk management system.

Kamakura Risk Manager (KRM) completely integrates credit portfolio management, market risk management, asset and liability management, Basel II and other capital allocation technologies, transfer pricing, and performance measurement.

KRM is directly applicable to operational risk, total risk, and accounting and regulatory requirements using the same analytical engine, GUI and reporting.

Kamakura's risk management vision: completely integrated risk solution based on common assumptions and methodologies

KRM offers:

• Sophisticated Yield Curve Modeling
• Flexible Risk Factor Modeling
• Random Interest Rates Modeling
• Arbitrage-Free Financial Instrument Valuation
• Scenario Modeling and Portfolio Stress Testing
• Delta-Normal Value at Risk Measurement
• Historical Value at Risk Measurement
• Monte Carlo Value at Risk Measurement
• Dynamic Value at Risk and Expected Shortfall

Basel II Standardized and IRB

The Basel II guidelines promulgated by the Bank for International Settlements (BIS) establish capital adequacy requirements and supervisory standards for banks to be implemented by 2007 or as guided by the regulator concerned of each country. Basel II compliance is probably the single greatest challenge - and opportunity - for banks during the next few years. The challenge of Basel II comes from the significant changes to bank policies, procedures and methods it implies and from the need for technological solutions that do not exist or are inadequately developed in most banks today. But Basel II also provides banks with opportunities to realize many managerial and financial benefits, especially under the IRB advanced approach, as indicated below. Potential Benefits of The Basel II IRB Advanced Approach

Managerial Benefits

• Clear communication of risk appetite and processes in place to amend appetite (expressed through credit limits) in changing environment
• Improved capability for setting and monitoring risk limits
• Opportunity to measure risk consistently across products and business units
• Opportunity to identify and manage inter-relationships between risks
• Improved internal audit approaches resulting from potential connections between risk indicia and audit plans
• A better framework for new business development
Profit Benefits

• Lower loan losses resulting from better credit risk evaluation capacities for new credits
• Lower loan losses resulting from earlier detection of deteriorating credits
• Lower loan losses resulting from better diversification
• Better risk adjusted pricing
• Potentially higher yields from previously under priced credits
• Reduction in long term adverse portfolio selection
• Lower operational losses resulting from better controls and monitoring
• Potential to increase leverage/gearing

Kamakura Corporation offers a range of Basel II solutions to help banks realize these opportunities. The Kamakura Risk Manager (KRM) software offers a comprehensive set of solutions to assist banks in developing credit, market and operational risk models and in performing Basel II analyses. Kamakura Risk Information Services (KRIS) complements KRM by providing banks with a solution for the default probability (PD) estimates from an external source required under the IRB Approaches. And Kamakura can also provide a range of Basel II related consulting services to help banks implement their Basel II solutions. These solutions offer support relevant to all three Basel II pillars:

• Pillar 1: minimum regulatory capital requirements
• Pillar 2: supervisory oversight of the minimum requirements and other capital issues, and
• Pillar 3: disclosure requirements providing market discipline on bank capital adequacy

Kamakura's solutions also cover the three separate sources of risk explicitly covered by Basel II's Pillar 1 regulatory capital requirements: credit risk, operational risk, and market risk. Kamakura's credit risk solutions help banks determine the minimum capital needed to offset potential future losses from credit defaults. The potential for future losses from operational risks, such as from inadequate or failed internal processes, people and systems or from external events and the related minimum capital requirement for operational risk can be analyzed with assistance from Kamakura's operational risk solutions. And Kamakura's market risk solutions can help determine the minimum capital requirement for market risk in a bank's trading book. So banks can look to Kamakura for a comprehensive set of Basel II solutions. Credit Risk

Credit Risk solutions from KRM will satisfy all regulatory guidelines and Basel II Std and IRB approaches. The focus is on economic capital concept while complying with regulatory guidelines, if any.

All models of credit risk are firmly rooted in the concepts of efficient markets. Kamakura believes that market prices of credit derivatives, debt instruments and equities all provide useful and related information on the credit quality of the underlying institution, but moving rationally in different ways because of distinct rights and privileges of the security holder.

Kamakura's credit risk solution is built solidly on the same analytical foundation underlying its other modules, with six yield curve smoothing methods and five different term structure models for valuation, pricing, and hedging of a wide range of equity securities, fixed income securities, foreign exchange contracts and an unmatched list of derivatives and exotics.

Kamakura's credit risk solution is designed and constructed to solve a number of practical issues confronting both loan portfolio managers, managers of counter-party credit risk, and traders in credit derivatives.

Kamakura's industry leading credit risk analytics were first released in production form in May, 2000. Kamakura's risk management software clients now for the first time can perform key risk management tasks in one piece of software with one data base, one graphic user interface and one set of analytical libraries:

• Calculate default probabilities and expected losses for sovereigns and municipalities
• Corporations and other issuers of equity and debt securities
• Calculate credit-adjusted, option-adjusted value
• Calculate credit-adjusted, option-adjusted value at risk
• Calculate credit-adjusted, option-adjusted hedges for credit, market and interest rate risk
• Calculate credit-adjusted net income simulation
• Stress test all risk measures for changes in any risk factor, including credit risk
• Credit-adjusted transfer pricing

Kamakura Risk Manager (KRM) uses a solid analytical foundation with six yield curve smoothing methods and five different term structure models for valuation, pricing, and hedging of a wide range of equity securities, fixed income securities, foreign exchange contracts. KRM also delivers an unmatched list of derivatives and exotics.

The KRM features the following key extensions of Kamakura's industry-leading analytics:

• Implements Robert Jarrow's reduced form model of credit risk with a time dependent default intensity
• Utilizes observable debt prices to imply both default intensity and market liquidity's impact on observable credit spreads for sovereigns, corporations and other issuers of debt. Counterparties who are not themselves issuers of debt are modeled using another credit as a benchmark for their credit risk. Their default may or may not be correlated with the benchmark.
• Recognizes that the liquidity of the debt markets and the equity markets impact market prices and that this impact should not be mistaken for a change in default probabilities
• Introduces a seventh KRM yield curve smoothing method, maximum smoothness credit spread smoothing. Maximum smoothness credit spread smoothing, along with the Jarrow liquidity adjustment, reveals expected losses implied by debt prices with great clarity
• Models credit-adjusted value at risk with the true "two humped" probability distribution that results when issuers of debt are truly in distress.
• Shows the impact of default on value at risk, even with diversification, in a way that makes clear why there are fat "tails" in the true loss distribution.
• Produces default probabilities without reliance on unobservable factors like "the expected return on the market portfolio" or the correlation between two unobservable variables (both of which are necessary in using the Merton model to calculate default probabilities)
• Provides true credit-adjusted mark to market gains or losses and expected losses, not just replacement cost times the expected loss given default Market Risk

On a completely scalable platform, Kamakura's market risk solution provides total integration of credit risk, market risk, asset and liability management, and performance measurement.

Kamakura's market valuation solution dates from 1993, when we introduced the world's first option-adjusted valuation package featuring a full suite of term structure model analytics and fixed income options technology. The quality of the numbers produced by a risk management system is the single most important measure of the system's ability to help organizations improve shareholder value. Kamakura boasts a 100% installation success rate and has never failed to produce high quality risk management results for Kamakura clients using client data on the client site.

Kamakura Market Valuation

Many risk management experts rely on valuation and stress testing in addition to value at risk techniques. Thus accurate market values are even more critical than they are in a VAR context. Kamakura's valuation technology is unique in the following ways:

• Seven VaR Models with user defined confidence levels
• Default adjusted multi-period VaR methods
• Seven yield curve smoothing methods including an unpublished maximum smoothness credit spread technology
• A wide variety of fixed income data input formats
• Interest rate probability distributions for any rate level and time horizon
• Automated forward rate curve generation
• Fixed and floating rate instrument valuation
• All common principal amortization conventions
• Arbitrary interest and principal payment schedules
• Multiple day count conventions
• Payment in advance or arrears
• Customizable holiday tables
• All common derivatives (see Kamakura software overview for partial list)
• CMO valuation via a link to the Index libraries
• Complex mathematical functions for floating rate indices, including lags and moving averages, minimum of two rates, maximum of two rates, etc.
• Five term structure models
• Fixed length and variable length lattice technology for options valuation
• User control over number of steps in lattices
• Multi-factor credit model capability
• Common Monte Carlo simulation engine for valuation, VAR and net income simulation
• Three methods of prepayment analysis (transactions cost approach, prepayment table approach and prepayment function approach)
• Arbitrary definition of risk factors
• Stress testing with respect to any risk factor
• Transaction-level processing
• Proprietary published valuation formula for non-maturity deposit valuation
• Built in linear and non-linear regression
• Reduced form credit risk and default models by Robert Jarrow
• Exact default adjusted valuation
• Back testing

Kamakura Value-At-Risk

When it comes to value-at-risk, Kamakura Risk Manager (KRM) includes three popular methodologies:
• Variance-covariance (matrix) value-at-risk, as popularized by JP Morgan
• Historical value-at-risk, using historical market values
• Full option-adjusted, credit adjusted Monte Carlo simulation driven value-at-risk
Variance-Covariance Value-At-Risk

• KRM can generate a variance-covariance matrix internally from historical risk factor data
• KRM can also acquire third-party sources of variance-covariance matrix data on a fully automated basis using standard data mapping tools
• KRM can process risk factor shifts of any user-desired magnitude
• KRM allows rich web-based or Excel-based reporting using KRM's standard third party reporting tool Crystal Reports
• KRM supports a single enterprise-wide portfolio VAR run, while simultaneously producing fully consistent VAR for one or more "cuts" of the portfolio by organizational unit, customer category, product category
• KRM processes the entire portfolio on a transaction by transaction basis, even if it includes millions of transactions

Historical Value-At-Risk

• KRM produces historical value-at-risk measures both for use in their own right and as a back-testing methodology
• KRM can produce historical volatilities and covariances automatically in KRM format for processing
• KRM supports a single enterprise-wide portfolio VAR run, while simultaneously producing fully consistent VAR for one or more "cuts" of the portfolio by organizational unit, customer category, product category
• KRM processes the entire portfolio on a transaction by transaction basis, even if it includes millions of transactions
Credit-adjusted and Option-adjusted Value-At-Risk in KRM

Market participants are well aware that both variance-covariance VAR and historical VAR grossly underestimate the risk in almost every portfolio. There are many common sense and analytical reasons why this is true:

• Portfolio value changes are not normally distributed. As bankers know, lenders have almost no "upside" and and 100% downside. Historical and variance-covariance VAR ignore this simple truth, assuming symmetrical gains and losses
• Both historical and variance-covariance VAR methods ignore cash flows between now and the value at risk date
• Both methods ignore embedded optionality and other financial options that may be exercisable between now and the value at risk date. When value at risk is being used to determine loan loss reserves, capital adequacy, and internal capital allocations, the value at risk date is commonly many months in advance. That leads to a value at risk calculation on the portfolio the firm has now, not the portfolio the firm will have on the value at risk date
• Both methods tend to ignore the risk of default, modeling at best variations in credit spreads. This ignores the fact that a default the day before maturity can still result in the loss of 20 or 30% of the principal on the bond. Moving credit spread in a simulation from 5% to 30% on the day before maturity only reduces the bond's present value (5% coupon, 100 principal) from 104.99 to 104.92. Explicitly modeling the loss given default would recognize the real possibility of a major reduction in value from default. Historical value at risk and variance co-variance value at risk ignore this risk and dramatically understate credit risk
• Both methods suffer from "survival bias." They use historical data on the risk of counterparties that the firm has now, none of which (by definition) would be in the portfolio if they had gone bankrupt during the historical period - the "special asset division" has the bad credits! Again, this results in the dramatic understatement of measured risk Kamakura Risk Manager has been carefully designed to avoid these pitfalls. Full credit-adjusted and options-adjusted Monte Carlo driven VAR is the only methodology for doing this successfully.
Advantages of KRM's Option-adjusted and Credit-adjusted Value-At-Risk

Kamakura Risk Manager has a number of very significant advantages which we believe result in the most accurate value at risk technology in the industry:

• KRM features explicit transaction by transaction valuation in every scenario using derivatives analytics by Dr. Robert Jarrow.
• KRM explicitly models all cash flows between now and the value at risk date and reinvests them in user-specified investment vehicles
• KRM explicitly models the impact of default, not just movements in credit spreads, using state of the art credit models developed by Dr. Robert Jarrow and others.
• KRM's random number generation is completely consistent and fully integrated whether the purpose is valuation and value at risk or net income and balance sheet projection on a financial accounting basis. The risk factor engine is the same.
• Kamakura can provide credit risk and risk factor data in a KRM compatible format via Kamakura Risk Information Services
• Kamakura can provide full value at risk processing via Kamakura On-Line Processing Services Operational Risk

Integrated and scalable from the desk top to the full enterprise in three-tiered client server mode, Kamakura's operational risk management solution can process millions of transactions using Kamakura Risk Manager's (KRM) distributed processing features.

Kamakura believes that clients should have total control over the analytical methods used, whether they are basic industry standard calculations that are decades old or the latest state of the art credit models from leading risk management researcher Dr. Robert Jarrow.

In Kamakura Risk Manager, the recovery rate for a Operation Risk Event can be modeled either as a constant proportion of loss or as a random event using one of four probability distributions in KRM. The recovery rate options for operational risk are identical to those that are available for modeling credit risk:

• Constant Recovery Rate
• Normal Distribution
• Lognormal Distribution
• Beta Distribution
• Logistic Function
The recovery rate can be driven by some or all of the same factors that drive the probability of the operational risk event. The operational risk gross losses depend on the nature of the loss event. These losses are user supplied in the Kamakura Risk Manager implementation. For a comprehensive implementation of operational risk events, a full multi-period simulation with macro factors driving operational risk probabilities and recoveries up and down. Loss severity ,loss frequency etc are also considered in OR modeling

KRM does

• Operational risk modeling
• Operational risk model testing
• Operational risk recovery modeling
• Operational risk recovery model testing
Kamakura's operational risk solution offers distinct advantages in measuring Variance-Covariance Value-At-Risk, Historical Value-At-Risk, Credit-adjusted and Option-adjusted Value-At-Risk.

The Kamakura Risk Manager framework is based on a "multiple models" orientation, not just for operational risk but for the full range of enterprise wide risk management calculations: yield curve fitting, yield curve and spread simulation, options valuation, default modeling, prepayment modeling and other insurance event modeling.

Advanced Macro Factor and Interest Rate Modeling

KRM OR takes full advantage of the advanced interest rate modeling functionality available in the KRM solution. This is important, for example, because some operational risks are a function of the value of selected assets and liabilities, like the probability of a "rogue trader" incident. "Rogue traders" are classified as rogues because their position has moved against them to such a large extent that they seek to hide it. No one with a profit is considered a "rogue," although they may have violated trading limits. Other operational risk, like the bank robbery example above, may have no dependence at all on securities valuation. For those operational risk events where securities values matter, KRM OR uses the KRM valuation yield curves to determine the economic value of those securities at different points in time, and it uses the randomness of simulated securities values to drive both the probability of an operational risk event and the recovery rate on that event if it occurs. Operational risk-related securities valuation in KRM OR depends on high quality yield curves with discounting functionality at any possible cash flow date.

The yield curve smoothing functions in KRM define the relationship between a specified tenor and the yield, discount rate, or forward rate corresponding to that tenor on the valuation date. KRM OR provides several different forms of yield curve smoothing methods that can be employed in transfer pricing. There are six methods in KRM for smoothing the yield curve itself, and an additional six methods for smoothing the credit spread relative to a "risk free" yield curve. For more on these smoothing techniques, please see Chapters 8 and 18 of Advanced Financial Risk Management. KRM OR can also calibrate the parameters of the yield curve for a given operational risk valuation date to observed market yields or bond prices with similar risk characteristics on that date. These features assure that the calculated operational risk cash flows and valuations are consistent with market interest rates. Securities associated with operational risk often contain embedded options, such as a call option on the remaining cash flows of the instrument or a prepayment option. Additionally, operational risk-related floating-rate instruments have future cash flows that are contingent upon future interest rates, and these instruments may also have embedded rate options, such as caps or floors. The value of these embedded interest rate options depends upon the dynamics of the underlying interest rates and the yield curve from which they are obtained.

KRM OR models these interest rate dynamics for a given yield curve using one of several forms of parameterized N-factor (i.e. arbitrary number of yield curve drivers) dynamic yield curve (term structure) models, such as the Hull White (extended Vasicek) model. KRM OR can also calibrate the parameters of the dynamic yield curve models using a sample of historical yield curves or a set of implied swaption volatilities. These features provide the underlying interest rate models required for valuation of complex interest rate options.

Dynamic Multi-Period Profitability Measurement

KRM OR extends the powerful multi-period portfolio simulation functionality available in the KRM solution to support profitability measurement based on both traditional sources of risk (credit risk, market risk, asset and liability management, etc.) and operational risks. The multi-period simulation functionality produces projected cash flows associated with operational risks plus interest cash flow, income and expense, accrued interest and market value results for each transaction on and off balance sheet during a specified sequence of accounting periods based on simulated yield curves and other factors during those periods. The periods in the accounting calendar are fully customizable to allow results to be calculated with the time granularity required for profitability measurement. Hedge Accounting Systems Risk

In order to better manage recent developments in financial accounting standards, Kamakura's risk solution provides a tool for hedging institutions to accomplish a number of critical tasks.

Recent developments in financial accounting standards are resulting in their closer alignment with the mark-to-market orientation of risk management. International Accounting Standard 39 (IAS39) and the U.S. Financial Accounting Standard 133 (FAS133) both require financial institutions and corporations to clearly demonstrate the effectiveness of hedging strategies.

Kamakura's mark-to-market capabilities stem from our critical role as a market risk system in major institutions around the world. Historical simulation of hedging effectiveness is one of the unique features of the three types of value at risk analyses in Kamakura's solution package.

Kamakura Risk Manager & IAS39

Absent proof of effectiveness, hedging institutions will be unable to align gains or losses with the declaration of interest income on the hedged assets. KRM can help your organization meet the standards of IAS39 by accomplishing a number of critical tasks:

• Mark to market capability - past, present or future date or dates - on traditional financial assets and sophisticated derivatives transactions as part of a simulation of hedging effectiveness.
• Cash flow generation on traditional financial assets, recognizing that much of the cash flow on financial assets is random due to features like floating rate interest payments, prepayment and default.
• Cash flow generation on sophisticated derivatives, recognizing that much of the cash flow on the derivatives is subject to change based on market conditions on the payment dates.
• Linear regression linking the market values and cash flow generated by both the traditional financial assets and the hedging derivatives - used to statistically prove the effectiveness of the hedge on either a mark value or cash flow basis.

Zylog-Kamakura's risk management and accounting experts also work with clients to show:

• How Our data tables can link specific financial assets and other transactions being hedged to specific derivatives transactions being used to hedge; Our table structure provides for a unique hedge identifier for this purpose with proper security.
• How to perform IAS-compliant linear regressions on KRM simulation output to establish hedging effectiveness.
• How to create reports specific to that institution's requirements to report key data for appropriate accounting entries and hedge documentation.

Portfolio Modeling

Based on sophisticated analyses of market and financial data using advanced quantitative models, Kamakura's modeling solution is a collection of financial information services that subscribers can access on the Internet at their convenience.

Kamakura Risk Information Services (KRIS) provides daily updates on counterparty credit information via a suite of dynamic modeling tools for both corporate and sovereign counterparties and rooted in the industry's most advanced quantitative credit modeling capabilities. (Multiple independent tests have established that the KRIS default probability models significantly outperform all other established vendors for predictive power.)

KRIS enables banks, portfolio managers and credit market participants with an array of tools to measure or manage Default Probability Estimates for Credit-Risky Entities, Term Structure of Default Probabilities, Basel II Default Probabilities, Multiple Default Probability, Yield, Discount and Forward Rate Curves, and Interest Rate Volatilities.

Credit Portfolio Analysis

KRIS credit portfolio analysis features high ease of use due to its seamless integration with the Kamakura default probability service and its reliance on the extensive Kamakura network of multi-chip servers Which perform the calculations?

Overview

KRIS credit portfolio analysis boasts a number of important features that make it unique among analytical packages, chief among them are a multiple models approach, powerful servers hosted by Kamakura in a highly secure computer facility shared with major financial institutions and agencies of the U.S. government, and repeated demonstrations as more accurate than agency ratings and agency-supplied default probabilities as a basis for default prediction.

Benefits

The primary benefits of KRIS credit portfolio analysis are objective credit quality measurement, modern default correlation technology, high performance default prediction and no conflict of interest. credit portfolio modeling analyses are available via online access.

Techniques

Users can choose among multiple credit portfolio simulation techniques. These techniques include the commonly used Copula/Merton approach as well as more advanced methodologies such as Macro-Factor Driven Default Probability Portfolio Modeling which can pull from 27 international macro-economic factors. Outputs include valuations, value distributions, losses and loss distributions.

Fund Transfer Pricing

Kamakura Corporation has consulted with major financial institutions around the world on transfer pricing and pushing forward the state of the art. Kamakura's transfer pricing clients range in size from $6 billion in assets to $500 billion in assets. The transfer pricing field is changing rapidly and the most exciting developments include credit-adjusted transfer pricing, internal credit derivatives and option-adjusted transfer pricing.

Kamakura's transfer pricing solution is the first transfer pricing module in the industry to offer full option-adjusted transfer pricing, with arbitrary degrees of consumer "rationality," all performed on a multi-currency basis.

Kamakura's transfer pricing solution allows for multiple transfer pricing centers and for a separate "ALCO book" and "irrationality book" for that part of the organization which assumes the risk of consumer option exercise.

Kamakura Transfer Pricing

Kamakura Corporation has consulted with major financial institutions around the world on transfer pricing and pushing forward the state of the art. Kamakura's transfer pricing clients range in size from $6 billion in assets to $500 billion in assets. The transfer pricing field is changing rapidly and the most exciting developments include the following topics: Credit-adjusted transfer pricing, internal credit derivatives and option-adjusted transfer pricing.

Kamakura Risk Manager's (KRM) transfer pricing analytics allow for a credit risk book that is fully consistent with Kamakura's KRIS corporate and sovereign default probabilities and the credit adjusted valuations of KRM. KRM's transfer pricing calculations, first released in 2001, take advantage of the same features that all

Kamakura risk analytics share:

• Same graphic user interface
• Same ODBC data base design
• Same financial analytics
• Same multi-currency term-structure model-based approach
• Same credit default modeling and valuation approach

KRM's design is rooted in the 25 year involvement of senior management at Kamakura in transfer pricing issues, beginning with Dr. Donald van Deventer's introduction to the subject at Bank of America in 1974 while working for Mack Terry, the father of the transfer pricing discipline in banking.

Dr. van Deventer and Dr. Dennis Uyemura also wrote about the conceptual aspects of the transfer pricing discipline in their popular book, Financial Risk Management in Banking. Because KRM is a single, integrated system, one can run the following analytics on a fully consistent basis:

• Traditional transfer prices without consideration of optionality
• Credit-adjusted transfer prices reflecting true borrower credit spread
• Option-adjusted transfer prices with fully rational consumer behavior
• Option-adjusted transfer prices with partially rational consumer behavior
• Net income simulation for each transfer pricing book
• Full mark-to-market of the transfer pricing books
• Multi-currency option-adjusted value at risk
• Multi-currency option-adjusted stress-testing
• Full credit adjusted valuation
• Default probability estimation and simulation
• Transfer pricing and valuation of non-maturity assets and liabilities

KRM produces many standard reports that can be exported to Excel or web pages using the Crystal Reports reporting tool:

• Business unit net income, both matched maturity basis and regular
• Business unit mark to market "equity", both matched maturity and regular
• Business unit value at risk, both matched maturity and regular
• Transfer pricing unit net income, both matched maturity basis and regular
• Transfer pricing unit mark to market "equity", both matched maturity and regular
• Transfer pricing unit value at risk, both matched maturity and regular
• Total bank net income, both matched maturity basis and regular
• Total bank mark to market "equity", both matched maturity and regular
• Total bank value at risk, both matched maturity and regular
• Credit-spread based
• Net income
• Mark-to-market valuation
• Value at risk
• For each business unit, the transfer pricing unit, the credit unit, and the total bank
• Drill-down display of credit spread and transfer price for every asset and liability
• Summary credit spread and transfer price for each business unit and product

Kamakura Risk Information Services (KRIS)

Kamakura Risk Information Services (KRIS) provides risk information such as default probabilities, default correlations, implied spreads and implied ratings for a wide range of counterparties. In addition, KRIS provides the ability to do online credit portfolio modeling and analysis.

Kamakura's industry leading research coupled with its established expertise in credit technology solutions provide clients with the data, tools and insights necessary to manage the risks inherent in their portfolios and identify market opportunities.

KRIS offers industry leading quantitative credit risk measures such as default probabilities, implied spreads and implied ratings for corporate and sovereign counterparties. These measures are updated daily and available via the Web or downloadable for use with existing systems or in conjunction with the Kamakura Risk Manager Enterprise wide risk management suite.

Kamakura utilizes the KRIS default and correlation service to track a global index of more than 27,000 public companies in 30 countries to produce the company's monthly default probability reports; default predictions are based on a sophisticated combination of financial ratios, stock price history, and macro-economic factors.

KRIS is critical to risk managers, credit managers, treasurers, investors, traders and other financial decision makers in banking, insurance, investment management, corporations and governments.

Kamakura Default Probability Models

The Kamakura Default Probability Models provide investors, investment managers, dealers, traders, lenders and auditors a simple, objective means of assessing the credit quality of credit-risky public firms. Credit quality is measured in terms of the probability of default of a credit-risky firm.

Kamakura Default Probabilities

Kamakura provides default probability measures for both corporate and sovereign counterparties which can be used to assess credit worthiness of an entire credit portfolio or on a single name basis. Inputs to the Kamakura models include company specific attributes, industry related measures and relevant macro-economic factors. Independent tests have confirmed that Kamakura default probabilities have the highest performing predictive power available in the market.

Features of the Kamakura Default Probabilities (KDPs):

• Multiple Models approach
• Highest performing predictive power available in market
• Transparent, testable, reliable
• Full term structure of default
• Corporate and Sovereign models
• Daily updates
Kamakura Implied Spreads

Kamakura's Implied Spread model is an estimate of the credit spread of a company derived from company specific attributes, Kamakura default probabilities, industry classification and relevant macro-economic factors.

Features of the Implied Spread model are:

• Provides coverage when no spreads available in market
• Full term structure of spreads for bid, offer and trade
• Calibrated to actual market spread data
• Updated daily
Kamakura Implied Ratings

Kamakura's Implied Ratings model provides a most likely agency rating for a company based on company specific attributes, Kamakura default probabilities, industry classification and relevant macro-economic factors along with the historical behavior of the rating agencies.

Features of the Implied Rating model:

• Provides implied rating for companies where ratings not publicly available
• Full probability distributions for a given agency ratings based on both company specific attributes and relevant macro-economic factors
• Probabilities of rating upgrades and downgrades Benchmarked against actual historical rating agency assignments Updated daily
Kamakura Default Correlations

Kamakura provides default correlations over its full universe of counterparties for each of Kamakura's default probability models. Different default modeling techniques and assumptions can produce varying results. As an example, the Wall Street Journal reported on August 12, 2005 about the very large hedge fund losses that occurred in May when GM and Ford were downgraded. Many traders held long positions in the bond and short positions in the common stock, a common hedging strategy for those who believe that the Merton model is an effective hedging tool. Unfortunately the Merton implication that stock prices and debt prices move in the same direction is true only about half the time and traders suffered large losses from this kind of strategy in the GM and Ford cases. For this reason, KRIS users asked Kamakura to develop pair-wise default probability correlations that go far beyond the basic Merton/Copula approach. The KRIS Web site includes coverage of 20,000 companies in 29 countries. The total number of pair wise default correlations available is more than 2.8 billion.

Credit Portfolio Analysis

KRIS Credit Portfolio Analysis provides sophisticated investors an independent, state-of-the-art ability to evaluate both the market value and loss distribution of credit portfolios and tranches of portfolios, especially those of synthetic collateralized debt obligations. The Credit Portfolio Analysis is an add-on to Kamakura Risk Information Services' KRIS-cr Version 4.1 default probabilities.

KRIS credit portfolio analysis features high ease of use due to its seamless integration with the Kamakura default probability service and its reliance on the extensive Kamakura network of multi-chip servers which perform the calculations.

Overview

KRIS credit portfolio analysis boasts a number of important features that make it unique among analytical packages, chief among them are a multiple models approach, powerful servers hosted by Kamakura in a highly secure computer facility shared with major financial institutions and agencies of the U.S. government, and repeated demonstrations as more accurate than agency ratings and agency-supplied default probabilities as a basis for default prediction. Benefits

The primary benefits of KRIS credit portfolio analysis are objective credit quality measurement, modern default correlation technology, high performance default prediction and no conflict of interest. credit portfolio modeling analyses are available via online access.
Techniques

Users can choose among multiple credit portfolio simulation techniques. These techniques include the commonly used Copula/Merton approach as well as more advanced methodologies such as Macro-Factor Driven Default Probability Portfolio Modeling which can pull from 27 international macro-economic factors. Outputs include valuations, value distributions, losses and loss distributions. Troubled Company Index

KRIS Troubled Company Index provides estimates of the full term structure of default probabilities of an individual firm based upon current public information about the firm, its economic environment, and the current risk of the public firms in its industry. Since 2002 Kamakura has been reporting its troubled company index via media outlets immediately after the end of each month.

Kamakura defines a troubled company as one whose annualized monthly default probability is more than 1.00%. The troubled company index represents the percentage of firms in the global KRIS public firm universe classified as troubled. The current troubled company index is based on more than 20,000 firms in 29 countries.

KRIS users can construct their own troubled company index using any of the five default models currently available on KRIS, and by utilizing any maturity of default probability or any probability level that the user considers "troubled." Kamakura can also aid users in creating a daily updated "expected number of defaults index" for any subset of the KRIS coverage that is of interest to the user. Online Processing Services (KOPS)

Kamakura Online Processing Services (KOPS) recognize that many financial institutions, governments and corporations require risk management results but cannot currently invest the time or money in an external risk management software system.

Kamakura recognizes that many financial institutions, governments and corporations require risk management results but cannot currently invest the time or money in an external risk management software system. This is particularly true for institutions with limited information technology infrastructure, such as hedge funds, and for large institutions that require immediate results from an enterprise-wide risk management software package.

Kamakura On-Line Processing Services (KOPS) was introduced in 2000 and provides clients with a number of competitive advantages:

• Kamakura receives portfolio and market data in a client-designed format
• Kamakura uses its KRM-dm (Kamakura Risk Manager-Data Mapping) tool to map the data to standard KRM formats
• Kamakura returns results using Kamakura Risk Manager - Risk Portal, web based reporting tool
• Kamakura offers next day turn-around time for regular KOPS users and real-time capability is available on request
• No large or small limit exists on the number of transactions Kamakura can process
• The largest portfolio currently processed by a Kamakura client contains more than 92 million separate asset and liability items
• Processing is conducted via servers in a highly secure facility that Kamakura shares with major financial institutions and the U.S. government

Risk Consulting Services (KRCS)

Kamakura Risk Consulting Services (KRCS) represent a range of quantitative finance needs relating to asset valuation, derivatives pricing and risk measurement. In providing these services, Kamakura combines extensive industry knowledge, quantitative finance research, and practical experience in financial companies and other business organizations.

Kamakura offers a portfolio of consulting services relating to asset valuation, derivatives pricing, risk management and other quantitative solutions. We combine industry-leading research with practical experience in finance, trading, banking, economics and diverse business organizations. As a leader in quantitative finance and risk management innovation, Kamakura delivers counsel and results to help ensure our clients' competitive edge.Kamakura recently entered its second decade of delivering unrivaled consulting services to some of the world's largest and most important financial institutions. We also work with small to medium sized organizations on diverse risk management projects. Our primary criteria for entering into consulting engagements is the potential for producing results that improve client performance and the extent to which our knowledge and experience can effectively be applied.

From executive level strategy to technical quantitative analysis to financial advice, services are customized to meet the specific needs and resources of each client

Corporation Litigation Support Services

Expert testimony and valuation of structured securities, credit derivatives, portfolios and firms for criminal, civil, tax and bankruptcy proceedings. Kamakura's KRM system boasts more than 250,000 lines of software code and is used to value either full balance sheets or selected portfolios of complex securities for both Kamakura's software clients and for its advisory clients. Kamakura is prepared to provide expert testimony supported by methodical analysis employing the KRM system.

Corporate Risk Management

Risk management is a vital component of strategic planning. In order to maximize shareholder value while maintaining a prudent level of financial risk, you must understand the potential pitfalls implicit in a particular strategy. You must also develop organizational, procedural and systematic frameworks to ensure effective performance and risk management.

Risk and Performance Management

Management processes, methodologies and information systems provide the basis for implementing risk and management strategies. When properly designed, implemented and integrated these elements address an organization's risk and performance management needs consistently and reliably. This result is a systematic and continuous ability to measure financial risk and performance, and undertake managerial decisions and actions to ensure tolerable risk and high performance.

Risk and Performance Modeling

Quantitative finance models are the basis for valuing and analyzing the cash flows of risky portfolio positions and for measuring the financial risk of a portfolio. Kamakura has been instrumental in:r/> • Providing models of the term structure of interest rates and other market prices
• Reduced-form and structural models of the default risk of counterparties
• Valuation models for complex derivative instruments
• Smoothing models for interpolation of yield curves and other forward curves
• Measurement of Value-at-Risk, Cash-Flow-at-Risk and Earnings-at-Risk Kamakura's capability to develop innovative new models or enhance existing models is available as a consulting service to clients who require external resources for model development, testing and application.

Risk Assurance and Expertise

Corporate boards and senior management of many organizations require an independent review of current or proposed business strategies, policies and processes prior to approving managerial actions or decisions. Likewise, when managerial actions or decisions within an organization or by an outside party produce / produced substantial losses and pending litigation, boards and senior executives may need to investigate the cause/extent of losses and involve outside experts in the defense or prosecution. When these reviews and investigations relate to the financial risk management of an organization or other party, Kamakura-ZSL can provide the risk management expertise needed for proper review and analysis of the issue.