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FNBC had retained Hsieh in 1987 to develop for it a model to
measure credit exposure for interest rate and currency swaps. In
1988, Hsieh produced a paper which described the model (Hsieh
Model) that he developed for FNBC. The Hsieh Model used
quarterly historical interest and exchange rates, and the
resulting volatilities, correlations, and covariance, to perform
a Monte Carlo simulation to estimate a distribution of 10,000
possible outcomes for each quarter throughout the term of a given
swap. Hsieh developed two programs for FNBC in 1988. The first
program used the simulation model on an individual transaction
basis. The second program used the same statistical model but
did multiple transactions with the same counterparty and took
into account the netting of offsetting transactions with the same
counterparties. FNBC did not during the relevant years use the
second program.
c. FNBC’s VEP System
i. Evolution of the System
FNBC’s VEP system during the relevant years had evolved from
the initial version designed by Hsieh. Each version of FNBC’s
VEP system was based upon the Hsieh Model. The first versions
were formulated on tables and were not accessible to traders via
direct computer link; i.e., on line. The first table version was
a table of values at different confidence levels. The second
table version was a series of tables by product, maturity, and
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