Different types of risks monitored by Middle Office are
Interest Rate Risks – DvO1 , Delta
FX risks: FvO1 , Beta
Additionally they use concepts like VaR, Stress testing, Scenario Analysis, Sensitive testing, PFE etc.
Sounds like Greek? Indeed these are all Greeks in Financial world, called as Delta, Theta, Vega, Gamma etc.
|1||Delta||Prices||First Order||Change in MTM of a derivative trade due to changes in market prices|
|2||Gamma||Prices||Second Order||Change to the Delta due to changes in market prices|
|3||Vega||Volatility||First Order||Change in MTM of a derivative trade due to changes in volatilities|
|4||Vega-Gamma||Volatility||Second Order||Change to the Vega of a derivative trade due to changes in volatilities|
|5||Theta||Time||First Order||Change in MTM of a derivative trade due to changes in time|
|6||Rho||Interest Rate||First Order||Change in MTM of a derivative trade due to changes in interest rates|
Please refer to Learning material section for more information on the above Greeks.
There is another department which works in line with Middle Office called as Product Control which is mainly into :
- P&L attribution & reporting
- Price Testing
- Formalizing accounting schemes
- Reconciliations of accounting entries between GL ( general ledger of the bank) and Treasury application
P&L = MTM today – MTM Prior Day closing rate
Now what is MTM?
MTM : Mark to Market / Model