The Accidental Trader Game

R&R Consulting Inc.

THE ACCIDENTAL TRADER GAME

R&R Consulting 2007

http://atg.creditspectrum.net

The Accidental Trader Game

R&R Consulting Inc.

INTRODUCTION. ....................................................................................................................................... 3 MAIN ELEMENTS OF THE GAME......................................................................................................... 4 PORTFOLIO.................................................................................................................................................. 4 EXPOSURE................................................................................................................................................... 4 Ratings. .................................................................................................................................................. 5 Trading. ................................................................................................................................................. 5 Buying and Selling Protection. .............................................................................................................. 5 CAPITAL...................................................................................................................................................... 7 Long Term Capital................................................................................................................................. 7 Short Term Capital. ............................................................................................................................... 7 Renting Capital. ..................................................................................................................................... 7 USER INTERFACE. .................................................................................................................................... 8 MAIN SCREEN. ...........................................................................................................................................10 Game Information.................................................................................................................................12 Portfolio Parameters. ...........................................................................................................................13 Expense Meter. .....................................................................................................................................14 Portfolio. ...............................................................................................................................................14 Control Buttons.....................................................................................................................................15 CAPITAL MANAGEMENT. ...........................................................................................................................16 Interest Rates. .......................................................................................................................................16 Renting From The Market.....................................................................................................................17 Renting From Other Teams. .................................................................................................................17 SCALE. .......................................................................................................................................................18 PORTFOLIO PROGRESS. ..............................................................................................................................19 Average Portfolio Rating X(t). ..............................................................................................................19 Probability Of Default. .........................................................................................................................19 VaR. ......................................................................................................................................................19 Total Cost Of Capital............................................................................................................................20 SKYPE. .......................................................................................................................................................21 WORLD EVENTS. ........................................................................................................................................21 LAST ACTIONS. ..........................................................................................................................................21 READY BUTTON AND TRAFFIC LIGHT. .......................................................................................................22 BASIC GAME STRATEGIES. ..................................................................................................................23 HOW THE SCORING WORKS. ......................................................................................................................23 MANAGING PROBABILITY OF DEFAULT.....................................................................................................25 THE COST OF CAPITAL. .............................................................................................................................25 TRADING EXPOSURES. ...............................................................................................................................26 BUYING PROTECTION RISK ELIMINATION. ..............................................................................................26 SELLING PROTECTION TAKING MORE RISK TO REDUCE THE COST OF CAPITAL. ...................................28 RENTING CAPITAL FROM OTHER TEAMS. ..................................................................................................28

The Accidental Trader Game

R&R Consulting Inc.

Introduction
The Accidental Trader Game is an educational tool designed to simulate the real-life experience of a risk officer or trader managing the credit risks of a large portfolio of corporate bond or loan exposures. Delegates have an opportunity to manage a large portfolio undergoing multi-period credit challenges by adopting various credit risk management strategies to keep the portfolio probability of default [Pd] at a pre-determined value, which the game administrator has set using a corresponding Value at Risk (VaR) level. In addition, the teams portfolio default probability must not exceed a given, critical level no matter what else is going on. If this level is breached, the game considers that the manager, or team of managers, has lost the ability to control the portfolio. That outcome corresponds in practice to economic loss for the firm and probable job loss for the manager. The game ends after a certain number of time periods, usually twelve, or when each team but the last - the winning team - is out of business. If more than one team survives, the team with the best Pd record is declared the winner [statistic factor], while other teams are ranked by their longevity in the game [stochastic factor]. At the beginning of the game, each team is provided with an initial portfolio of risky exposures. All exposures are assigned a credit rating reflecting its ex-ante probability of default. Associated with each risky exposure, is a set of financial characteristics commonly used as input variables in credit risk modeling and management, such as the recovery rate, loan-equivalent exposure and credit-default swap [CDS] spread. Those characteristics change with the passage of time and trigger various credit events such as upgrades, downgrades and defaults, which are reported at the beginning of each time step or round. So are key portfolio-level parametric averages: portfolio mean loss, portfolio loss standard deviation, and VaR to help managers in forming risk judgments and making tactical portfolio adjustments. At the beginning of each time step, teams borrow short-term funds from the market or one another in order to keep the portfolio probability of default at the target level. The game is not designed to create a portfolio whose value will increase secularly over time, the way a trader might view the credit problem. This is strictly about credit risk management, not credit risk speculation. Although the up side is always much more attractive in the stock market for instance, credit risk professionals are much more focused on the down side, hence the essence of the game. Teams can improve their performance through various risk-management tactics. They can swap out of risky exposures for anti-correlated equivalents to reduce portfolio sensitivity to extreme events, or buy or sell CDS contracts on their portfolio exposures. By doing so, teams can realize gains or losses as well as increase or decrease their exposure to the market.

The Accidental Trader Game

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Main Elements of the Game

Portfolio
Portfolio is the most general and most important concept in the game. After all, managing risks of a portfolio as a whole is the main goal of a risk manager. The portfolio consists of the set of N risky exposures, whereby N is arbitrary. Each exposure taken alone does not carry much information for the risk manager. However, taken together they determine the values of the main portfolio characteristics.

Exposure
Even though a single exposure does not reflect much of the characteristics of a large portfolio, it is still useful to know information about individual risks. Usually, a risk manager will be interested in monitoring the most risky components of the portfolio. Therefore, the game gives participants the ability to review individual exposures and take actions, like trading and buying or selling protection. This is how a manager can bring the whole portfolio to a desired risk level. The game provides the following parameters, displayed on the exposure screen, portfolio table or both: Name. Every exposure is assigned a unique identifier and a name. The exposures name doesnt carry any useful information and serves only to identify single loans in a more realistic context. Thus, the fact that an exposure is called Microsoft does not mean that it should have a high rating and therefore, a low probability of default. Rating. A Moodys letter-grade rating is assigned to each exposure. The rating is based on the probability of default. The lower the probability of default for a certain exposure, the higher the credit rating. Ratings can change from one time step to another as a result of natural exposure evolution, as well as from random world events. Participant can observe current and previous ratings at any given time step. Probability of default. One of the most important exposure characteristics. It is used to compute the likelihood that an exposure will default, its credit rating and its CDS spread. It also changes naturally as time passes based on the behavior of an arbitrary driving function y(t) and sometimes randomly jumps up or down as a result of world events generated by the system [a Levi-jump process]. Historical data describing probability of default x(t) and the driving function y(t) are displayed on the exposure screen as well. Loan Equivalent Exposure (LEE). This variable shows the dollar amount invested in each exposure. For the sake of simplicity, LEE is assumed to be constant

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across all portfolio exposures. The LEE amount influences the loss/profit profile in case of credit events, as well as CDS premia received or paid. Loss Given Default (LGD). The percentage of LEE which will be lost if the corresponding exposure defaults. LGD is used to compute expected losses, VaR, and the consequence to the holder of the exposure, or CDS seller, when default occurs. CDS Spread. Annual premium received or paid for protection on any given exposure. The more risky the exposure, the higher its CDS spread. The spread changes with time depending on the exposures system-computed probability of default to reflect market conditions. For the sake of simplicity, we assume that the bid/ask spread is zero.

As a result of a credit event or a natural evolution every exposure can default. Defaulted exposures stay in the original holders portfolio but are no longer used to compute risk characteristics. It is also not possible to trade an exposure after it has defaulted, buy and sell protection on it or do any other operation available with respect to the non-defaulted exposures. The loss in the event of default is added to the Total Realized Losses account and displayed in real time on the teams main screen.

Ratings
Letter-grade ratings are directly connected to the exposures probability of default, which itself varies naturally with time. The rating table can be accessed from the main screen (more on this in the user interface section below). Ratings are presented for informational purposes only. All computations use actual default probabilities. However, letter-grade ratings are easier to monitor and interpret for most market participants.

Trading
Every exposure in the portfolio can be traded. Every month a certain number of possible trading candidates will be available to all teams. These choices consist of exposures anti-correlated to the portfolio as a whole. There is a small transaction cost involved in trading, but in general it does benefit the risk manager to replace a highly risky exposure with an anti-correlated one because, as a result of this transaction, VaR will decrease. As a result, the amount of required risk capital will be lower. Consequently, less shortterm capital will be needed and lower interest payments will be made to those who provide such capital, thus decreasing the total cost of risk management. If a manager has bought or sold protection on the traded exposure, the said CDS contract will be automatically terminated upon trade execution.

Buying and Selling Protection

Every participant can buy or sell protection on any exposure in the portfolio. Buying protection will attract a known premium every month based on the annual CDS spread for the target exposure. The notional amount of protection purchased or sold is selected as an arbitrary percentage of the exposures loan-equivalent exposure. Therefore, to

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fully protect an exposure, a notional amount equal to LGD should be purchased. On the other hand, any amount of CDS notional can be purchased. If the exposure defaults, the protection buyer will receive the corresponding LEE amount and the CDS contract will be terminated. Protection can also be sold on the open market. However, the amount of protection which can be sold is limited by market interest. As a result of selling protection via a CDS contract, the seller will collect monthly premiums but will have higher expected losses, which will increase the selling teams capital requirements. If a credit event occurs and the target exposure defaults, the seller will have to pay the amount corresponding to the notional amount of the CDS contract. At that moment, the seller collects the last premium payment and the CDS contract is automatically terminated. Participants can terminate any CDS contract by entering into an offsetting contract with identical terms. In that case, a termination value will be computed as of the current time step, resulting in a profit or a loss on the position.

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Main State and Control Variables Capital

The total amount of your capital directly linked with the default probability of your portfolio. Therefore, it is very important to have sufficient capital to cover your credit risk. The total risk capital you have available consists of two parts: Long Term Capital and Short Term Capital.

Long Term Capital [LTC]

Before you start a new, twelve-round session, you will have to decide how much Long Term capital you want to rent. This amount cannot be higher than the portfolios VaR at the beginning and will stay constant during the entire session. The interest rate on Long Term capital is much lower than that on Short Term Capital. Therefore, it might make sense to rent as much Long Term capital as you think you might need to cover your VaR during the game. However, renting too much LTC at the beginning of a session can result if less flexibility during the session, because you cannot adjust this capital during the session, which is why its called long-term. If this amount is greater then the current VaR requirement, you will not be able to adjust total capital in an effort to bring your probability of default to the desired level. In that case, you will be wasting capital. Of course, you can rent someone elses capital if you think that may help, although doing so will tend to be expensive since your rental cost will depend on your previous default probability. The idea is not to have too much or too little capital, but just the right amount.

Short Term Capital [STC]

Short Term capital is available for rent at the beginning of every month and it is always rented for a one-month term. Thus, any amount of Short Term capital you have rented for the previous time step will be given back to the lender at the end of the month. This form of capital gives participants the flexibility to address the current risk-situation in the portfolio and adjust total capital as mentioned above.

Renting Capital
At the beginning of each session, participants will decide how much Long Term capital to secure. After that, only Short Term capital will be rented. There are two ways to rent it. First, any amount of STC can be rented directly from the market at a given, floating interest rate. Second, it can be rented from other participants. In that case, the interest rate will be lower than the market rate. However, the renting team will have no effective control over how much capital is available for rent. The system will determine the amount of excess capital, if any, available to the lending team and then will transfer this excess amount to the renting teams account. To enter into rental agreements, teams can communicate with each other using their Skype account. Each team needs a Skype account and a pair of earphones.

The Accidental Trader Game

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User Interface
How to Join the Game
In order to join the game, you will need to have a password, enabling you to access the game server. The password will usually be provided by the game administrator. After logging into the server, teams will be able to register their name with the system. Below are detailed instructions on the registration step. Each name needs to select a unique team-identifier.

Games Web Page

First step is to visit our web site at: http://atg.creditspectrum.com The web site contains summary information about the game, as well as a user manual available for download. Click on the game screen-shot or on the link Play The Game to go directly to the game server.

Server Login
Now, you will need a log-in name and a password to login to the server. This information will be provided to you by the game administrator. This process will let you log in to the server not to the particular game. Usually, all participants will have the same name and password at this step. After logging into the server, each team will have an ability to choose which game to play, register itself, continue playing a previous game, etc.

The Accidental Trader Game

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Join the Game

If you have registered your team before, now is the time to join one of the new games. Type your teams name, password, and choose a game from the drop down box. Ask the administrator which game was created for you. If the name of this game does not appear on the list, please click the refresh games list button below. Once ready, press the submit button.

Creating New Account

If you havent registered your team yet, click on the Click here to register link. The registration form will come up. Please, provide all required information, including Skype id, which is important for you and other teams to be able communicate during the game. After that, click on the register button. A confirmation screen will be displayed. Now, your team can join any new game from the log in screen.

Re-Joining the Last Game

The first item in the game drop-down box will be [last game]. Players should choose this item if they wish to continue playing the previous game they were playing, and stopped playing for some reason. If that game is still running you can easily join back and start right from the place you stopped. This feature is useful in case the teams web browser or computer had to be rebooted, or if the game was postponed for a period of time, such as lunch.

The Accidental Trader Game

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Initial Capital Setup

Before beginning any new session, participating teams will be asked to set up their capital structure. As mentioned above, this will consist of two parts: Long Term- and Short Term Capital. The capital setup screen is shown below:

The maximum total capital available at the outset is equal to your portfolios current VaR. This amount should be divided between Long Term- and Short Term capital. Remember that the amount of Long Term Capital you choose remains constant during the session. As a general rule of thumb, it is reasonable to dedicate about 80% of total capital to Long Term capital and to rent the rest as the game proceeds. However, depending on a strategy a team chooses, this could be an under- or overestimate. After your capital structure has been set, press the Confirm and Close button. The system will wait until all teams have made their decision about the initial capital structure before proceeding to the next time step. Therefore, setting up the initial capital structure is the only required task during the first month of any session.

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Main Screen
Now, lets look at the main screen which will be used by playing teams to obtain current information and make their decisions. Before we proceed to the description of information and controls however, we need to say a few words about the sub-section of the main screen called World Events.

World Events
At the beginning of each time step, all teams will see this type of screen:

It informs players about what happened in the games world during the past month. The top part of the screen shows upgrades and downgrades. Upgrades are indicated by green, down-arrow symbols. The direction of the arrow means that the probability of default went down, hence the green (improvement) color. On the other hand, when an exposures default probability went up, a red (deterioration) arrow is displayed. Participants will also be able to see the name of each upgraded/downgraded exposure and how its letter-grade credit rating has changed. The screen section beneath upgrades and downgrades shows defaults that occurred during previous time steps. Defaults usually dont happen often; hence, it is very likely for no default to have occurred during any given month. However, there can be time steps where a few defaults will occur in a single month. Once a player presses the Confirm and Close button, this informational screen disappears and the main control screen becomes fully functional.

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Main Screen Overview

Here is a typical main screen display. It consists of several areas which we describe in detail below. In general, the most valuable information to a risk manager is displayed in the table in the top left corner. Here, a player can monitor important benchmarks associated with his or her current portfolio.

On the right of the table, a graph labeled Expense Meter is displayed. It shows the comparative performance of all teams playing a given game. As is implied by the graphs label, the lower a team is positioned on the graph, the better it is currently performing. Players can see all historical changes from the beginning of the session (time 0) until the current time step. The large section underneath the graph and the parametric table shows the teams current portfolio. Participants will see all exposures in the portfolio as well as their main characteristics (see above). To obtain more detailed information about particular exposures, you need to click on its name. For a description of the exposure screen, please see the corresponding section below. Finally, at the bottom of the main screen, a series of control buttons are displayed. They all have different informational or operational purposes and are described in details below.

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Game Information
The top part of the main screen shows general game information. Here, you can find contact information in case of technical issues, the name of connected team and of the current game, the current session and the current time step.

A game will normally consist of three sessions. In the example above, Session Number 1 of a three-session game is now in progress. The same logic applies to the Month indicator, i.e. there are twelve months in the session and we are now playing Month 6.

Portfolio Parameters
This is the most informative section of the user screen since it displays the main portfolio parameters. The most important ones are shown in bold font.

For instance, the amount of Short Term Capital rented during the current month is displayed below the label Short Term. As mentioned above, STC and LTC taken together determine VaR, which in turn determines the portfolios current probability of default. Thus, in the picture screen, the total amount of capital available is $855.00 while current VaR is $855.26. This computes to a current probability of default of 1%, which is the set point for the game. Also, a team can monitor its prior probability of default as well as the critical portfolio-default probability beyond which it is expelled from the game. In other words, if a teams default probability rises above this level at any time during the game, it will be expelled until the end of the session and will be allocated the highest expense level.

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The next line shows Value at Risk (VaR), mean portfolio loss, and portfolio loss standard deviation. These statistical measures are used to evaluate the credit risk in the portfolio and derive its probability of default. The final row in the table displays the Total Capital Expense one of the parameters used to determine a teams score. Expense can be positive or negative. A negative expense means that profits were realized as a result of risk management. Portfolio expenses include trading costs, any CDS premia paid and received, interest on rented capital, and interest received from renting a teams excess available capital to other teams.

Expense Meter
This graph shows the relative performance of all teams playing a game. Depending on actions taken by every team and due to a series of random worldevents, the Expense Meter for each team will be associated with different values as time progresses. The Expense value is cumulative, therefore only the last value is used when computing the final score. The graphs purpose is to give team members an idea of how they are doing during the session. Based on this information, a team can decide which actions, if any, to take in order to increase its risk management efficiency.

Portfolio
The portfolio is represented via the exposure table. Each exposure is displayed on a single row in the table. Exposures can be sorted by Name, Probability of Default [x], LGD, Loss, and associated CDS position. To sort the table, simply click on the corresponding label. When the same label is clicked a second time, the sorting order toggles between ascending and descending.

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Sorting the table is convenient in cases where, for example, participants want to see the exposures with the highest default probabilities or else their current CDS position on said exposures. As the default probability [x] changes over time, the corresponding arrow will be shown next to the x value. These arrows work the same way as those on the downgrade and upgrade screen mentioned earlier, i.e. when the default probability goes down, the arrow is green; when it goes up, it is red.

Control Buttons
The set of control buttons at the bottom of the user screen allows the team to perform various actions and to obtain useful feedback-information. The Capital Management button brings up the screen where Short Term Capital can be rented from the market, as well as traded with other teams. The Scale button provides the relationship scale between probability of default and letter-grade credit rating. Portfolio Progress shows the prior evolution of various portfolio characteristics.

The Skype button has Skype IDs of all playing teams and helps to establish communication between them. The Refresh Portfolio button is included to help players with older versions of web browsers. If you believe that your portfolio table does not reflect the real picture (for example just traded exposure is not in the portfolio), please press this button and the latest information will be retrieved from the database. The World Events button provides the log of all events that occurred during the current session. The log file contains all upgrades and downgrades, as well as all defaults with corresponding time step. The My Last Actions button displays a history of all prior actions taking by a playing team. These actions are recorded with their corresponding time step and other meaningful information. Sometimes, it can be helpful for players to see which actions have been taken as a guide to a better risk management strategy. The Ready button, when pressed, lets the system know that a team has made all its current decisions and is ready to proceed to the next time step. After a team presses this button, changes to any parameter can only be made at the next time step. In connection with this button, it is crucial not to forget to rent Short Term Capital at every time step. Also, please note that the system will prompt each team if the amount of its requested Short Term Capital is zero. At that moment, the team can decide to change it or else proceed if this value is a conscious part of its current risk management strategy, i.e. to rent zero Short Term Capital during the next time step. This maneuver should only be done carefully.

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Capital Management
Using this screen participant can mange Short Term capital. The small graph on the right hand side shows interest rates. The green line indicates Long Term Capital interest rate, which is constant over the course of the game. The blue line represents Short Term Capital interest rate, which changes from one time step to another. Any player can communicate with other players using the Skype buttons placed in front of team names in the table below. As mentioned before, there are two ways to obtain Short Term Capital, i.e. from the market and from other teams. We will now look at both ways a little closer.

Interest Rates
As you can see on the graph the Short Term Capital interest rate changes over time. Its always higher than the long term rate and intimately tied to the teams portfolio default probability. Normally, when a teams default probability rises, this rate will increase and conversely, when the default probability decreases, the rate decreases. Long Term capital is a much cheaper source of capital. However, it lacks the flexibility provided by Short Term Capital. Therefore, it is a good idea to wisely allocate an optimal amount of Long Term Capital at the beginning of every session. Participants should be careful when making a decision about this allocation. For instance, allocating too much Long Term Capital can lock in a teams total capital amount at a relatively high level, and hence prevent the portfolios probability of default from being maintained at the desired level. This means that the portfolio default probability will be too low even with zero Short Term Capital allocation. Conversely, allocating too little may lead to a higher total cost of capital, and therefore, to abnormally high total capital expenses.

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Renting from the Market

The first and most convenient way to rent Short Term capital is to rent it from the market. Players can see the annual cost of this form of capital on the main screen, on the capital management screen next to the Amount, $ field and on the associated graph. Any desired positive amount of Short Term capital can be requested and obtained from the market. To do so, simply enter the amount you need on the Capital Management screen and press the Confirm button. Be careful while making a decision about the amount you need. Renting too little can lead to a very high portfolio default probability, which means that your portfolios default probability would exceed the Doomsday value, leading to your expulsion from the session. If that happens, you will not be able to continue playing until the subsequent session, if any.

Renting From Other Teams

The second method of acquiring Short Term Capital is to rent it from other participating teams. Please note that it is not possible to rent capital from an expelled team. Therefore, if a team has been expelled, its name will not appear in the list of available rental candidates. This way of renting STC affords the renting team with a lower interest rate than the market rate. However, the amount of cash available for rent will be determined by the system before the beginning of the next round based on how much excess capital is then available to the lending team. Thus, the borrowing team cannot know beforehand the exact amount of capital that will be made available by the renting team. Nevertheless, this amount can be estimated by the lending team and communicated via Skype. If you wish to rent from a certain team, simply indicate that fact in the column labeled Rent next to the selected teams name. The lending team should state its intentions by selecting the Lend box corresponding to its partner-team name. Before the following round, the system looks at renting requests and matches those that correspond. This means that a teams renting mechanism will be executed if and only if Team A has chosen to Rent from Team B and Team B has chosen to Lend to Team A during the same round. If such a request is in place, the system will determine the amount of excess capital available to the lending team, if any, and transfer this amount of capital to the renting teams account. The renting team will pay interest for the amount transferred at its allocated rate and the lending team will receive this payment, reducing its total capital expense. Please note that both forms of capital rental can be used simultaneously. This means, that a team can place a request to rent from the market and at the same time, indicate its desire to trade with another team. The amount rented from the market will be allocated to the team regardless of its other activities.

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Scale
The Scale button acts as a source of additional information on how letter-grade ratings derived from the probability of default. For example, in the table at right, you can see that a Baa2 rating, on average, corresponds to a 1.25% annualized portfolio default probability. Actual default probabilities in the game are unlikely to be exactly the same as those in the table. In intermediate cases, the game uses the geometric average bracketing two lettergrade ratings to figure out which rating should be assigned to a particular exposure. Normally, a participant will not use this table explicitly. Nevertheless, it helps to establish an intuitive feeling between letter-grades ratings and default probabilities.

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Portfolio Progress
The Portfolio Progress button brings up a screen showing a time series of a teams benchmarks. There are five graphs available on this screen. We now briefly discuss each one below.

Average Portfolio Rating X(t)

The Average Portfolio Rating represents the average default probability of all exposure in a teams portfolio. It helps to visualize how the portfolio evolves. Is it too volatile? Does Pd increase or decrease in time? Etc. Knowing this information helps to estimate how much STC should be allocated to cover the teams portfolio credit risk for the next round.

Probability of Default
This graph shows the evolution of the portfolios default probability given total available capital in each round. As you will recall, every teams goal is to keep its portfolio default probability equal the set point (usually 1%) by renting capital, trading exposures, etc. Therefore, this graph shows how efficient a team is able to manage credit risk. The more volatile this graph, the worse the teams performance.

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VaR
VaR shows the portfolios Value At Risk metric as it evolves over time. This may be useful when making tactical decisions. One of the main tasks of a risk manager is to keep enough cash to cover VaR at all times. For example, on the graph at right, VaR at time step 9 was $750. If the playing team had a total capital in the amount of $750, it would be considered a very efficient team at managing credit risk.

Total Cost of Capital

This graph shows the total dollar cost of managing credit risk. As you can see on the picture, Total Capital Expense can be negative, which means that team realizes a credit profit while managing its credit risk. Profits can be realized in a several ways. As two obvious examples, we can mention: a) Selling of CDS protection and collecting the premium and, b) Lending excess capital to other teams and receiving interest income.

Expense Meter
To enable a quick comparison and an assessment of the game situation, a global Expense Meter is shown on the main screen. It shows the capital expense path only and a normalized numerical value of expenses. Using this graph, players can evaluate their performance from one time step to the next, and potentially correct their strategies. Thus, the expense meter can be regarded as the main game benchmark.

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Skype
The Skype button acts as a small communication center, providing the list of all playing teams and their Skype IDs. Players will need to use Skype to make verbal capital trading agreements with each other. The Status field shows whether a team is available to talk and, if pressed, automatically connects Skype to the corresponding team.

World Events
This is an informational screen displaying a log of all of all exposure upgrades, downgrades and defaults. Every entry shows the corresponding time step. All parts of this log have are shown to participants before every round. Therefore, the purpose of this screen is to provide players with additional historical information about World Events.

World Events occur randomly. Nevertheless, there is logic behind this randomness. Thus, its very unlikely that an exposure rated AAA would ever default. However, in some rare cases an exposure rated AA will be made to default. This can happen in the real world and the game carries this possibility as well.

Last Actions
The Last Actions screen keeps track of actions taken by players in the course of the session. Every action has a corresponding time step. This information can be used to

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refresh your memory on which actions were taken previously and to see how they affected the current situation. Among other things, participants can see how much capital they rented from the market, what CDS positions they entered to, which exposures where traded, etc.

Ready Button and Traffic Light

The last button on the main user screen is the Ready button. This button should be pressed when a team made all the decisions for current time step. Once pressed, there is no recourse. Its very important not to forget to rent Short Term Capital (when its needed, of course) before pressing the Ready button. Therefore, the system checks if Short Term Capital was rented from the market. If it wasnt, the system asks the player or team to confirm positively that not renting an STC was a conscious decision rather than a mistake. On the right corner of the screen, players can see Traffic Lights. These are not control buttons, but simply provide information about the games current status.

A green light means that players can make their decisions. In this mode, all buttons and screens are available to participants. After the Ready button is pressed, the light turns red, indicating that the system is waiting for all teams to be ready to start processing information. In this mode, all buttons are disabled and teams may not take any action. When all teams are ready and all requests have been processed by the system, teams are presented with the information window previously shown, the one that shows upgrades, downgrades and defaulted exposures. At that time, the traffic light turns yellow. This informs players that, when the Confirm button on the information window is pressed, they will be able to start making decisions (the green mode) that will affect the subsequent round.

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Basic Game Concepts

In this section of the manual, we will cover the basic game concepts. Each of them will concentrate on managing risk using one of the games components. It is crucial to understand that these concepts, taken in isolation, may not necessarily lead to a good risk management outcome. However, they can be used as building blocks to create more sophisticated and robust strategies.

How the Scoring Works

First, lets see how teams score points. A given teams total score consists of the two components mentioned elsewhere in this document. Briefly, they are: 1) 2) How close the portfolios default probability came to the set point (see below) at every round. What was total capital expended to achieve the above probabilistic result. In other words, how much did it cost to manage your portfolios credit risk?

Initially, both components are equally weighted. However, the game administrator can change the weights. This allows one of the above factors to influence the teams score to a greater degree than the other. The portfolios default probability at each time step should be close to the set point, normally 1%. The further the default probability departs from this level, the worse the teams performance and therefore the lower the score. There is no advantage to having the default probability below the set point. Moreover, there is no credit given to teams evidencing default probabilities lower than the set point, compared to those with default probabilities higher than the set point. For instance, a team with a portfolio default probability of 2% and another one with a probability of 0% would be scored the same because, in both cases, the probability is one percent away from the set point of 1%. The game contains another critical default probability level called the Doomsday level. Teams will be expelled from the current session when its portfolio default probability reaches the Doomsday value. Expelled teams will be ranked lower then any other team in the game no matter what score they currently register. If more than one team is expelled from the session, the team which survived the longer will receive the higher rank. The Total Capital Expense is the second contributing factor to a teams final score. The lower the price paid for managing its credit risk, the higher the value of the associated component in the final score. Therefore, it is not a good strategy from the expense standpoint to buy protection on every exposure in the portfolio, in an obvious and nave attempt to forestall all consequences of default, because the premia paid for this protection would increase the Total Capital Expense by a large amount. In general, a happy medium should be found by managing the portfolios default probability and paying as little as possible for doing so. This is the secret of winning the game.

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Each session is independent of any other session with respect to team scoring. After all sessions are completed, the system will compute the final game score and rank the participating teams based on the combined results of all sessions. Teams that were never expelled will be ranked based solely on their scores. Thereafter, teams that were expelled at least once will be ranked based on how many times they were expelled, how long they survived until expulsion and the score they had achieved at that time.

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Managing the Portfolios Default Probability

As mentioned above, the games main goal is to keep the portfolios default probability at every time step close to VaR precision level (1% by default). To achieve this, playing teams should have sufficient capital at all times for their default probability to be close to that implied by their VaR. This is not a trivial task, because portfolio exposures are made to undergo a largely random, but somewhat deterministic credit risk path that changes their individual default probability at each round, consequently changing portfolio characteristics. The random nature of exposure credit risk makes it close to impossible to predict the exact amount of VaR needed at the next time step to keep Pd equal to 1%. However, a rough estimation can be made based on the current VaR value and by looking at historical data on the whole portfolio. As we saw previously, the possibility to change Short Term Capital affords participants some flexibility in addressing their expectation of what VaR will be. Therefore, staying close to 1% should not be a big problem for a standard portfolio. In some cases, the portfolio can behave in a very volatile manner. Usually, this happens when several exposures in the portfolio have very low ratings (high probabilities of default). This can be addressed by trading these exposures for anti-correlated ones. As a result, the entire portfolio becomes less sensitive to World Events. As a result, VaR becomes much easier to estimate and therefore, controlling the portfolios default probability also becomes easier.

Total Capital Expense

The cost of managing risks accumulates within a special account labeled Total Capital Expense. Every time capital is rented from the market, or from other teams, interest will be charged to this account, including both STC and LTC. In addition, when CDS protection is purchased, the premium will be paid from this account every month. Conversely, if protection was sold, the realized premium will be transferred to this account. Last, when excess capital is lent to other teams, the corresponding interest earnings will show up in that account. If an exposure on which protection was bought defaults, the payment will be made by the protection seller depending on notional amount of the CDS contract. This payment will decrease the Total Capital Expense for the team by the same amount. By contrast, if a team has sold protection on an exposure which later defaults, the notional protection amount is added to the Total Expense account.

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Trading Exposures
Trading exposures provides a participating team with a very efficient and inexpensive tool for managing portfolio credit risk. Every month, each team will be offered a set of exposures that are deemed anti-correlated to its own portfolio exposures. Any exposure in the teams portfolio, except defaulted ones of course, can be traded in this manner. Transaction costs will be added to the Total Expense account. They are very low comparing to the amounts of money invested in the exposures, interest payments and CDS premia. Once exposure from the given set is chosen as a trading target, it replaces the original exposure in the teams portfolio. If CDS protection was purchased previously on the original portfolio exposure that is traded, the contract is terminated and the CDS termination value is added to the teams Total Capital Expense. The same procedure applies when protection was sold on the target exposure. As mentioned above, trading will be very helpful in cases when the portfolio contains some extremely risky exposures that make the task of estimating the VaR on the next time step practically impossible. Clearly, a team can always set up its own heuristic trading rules, like Dont keep any exposure with a default probability higher then 15% in the portfolio. Trading becomes a must have feature if such rules are to be enforced. However, the games main goal is not to trade exposures trying to stay away from all possible defaults. Rather, judicious a and spare use of trading is what is intended, hence the name of accidental trader

Buying Protection Risk Elimination

As an alternative, to trading, a team can always buy or sell protection on any exposure in its portfolio. Buying protection for a notional amount equal to LGD (loss given default) will result in total risk elimination for the particular exposure. For example, if the LGD on a certain exposure is 55%, then a long CDS position of 55% would result in $0 realized loss in the event of actual default. On the other hand, a 100% long position in CDS would generate a 45% profit if the exposure defaults. Thus, this position is considered bearish. Every exposure has its own CDS spread which changes over time, and which depends on how the credit risk of the exposure as measured by its numerical credit rating. Buying CDS protection requires a monthly premium at the market rate shown at the time the CDS contract is consummated. Therefore, after CDS protection is bought, a buyer is no longer affected by changes in CDS spread. A CDS contract can be terminated at any time by entering into the opposite contract, for instance by selling the same amount of protection that was bought earlier. In addition and as mentioned above, if an exposure already has a CDS contract associated with it, and the team decides to trade it for one of the anti-correlated exposures, the said CDS contract will be terminated automatically. In both cases, the termination value will be computed based on discounting the future cash flows to present. All CDS maturities are

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assumed to be equal to the number of rounds remaining until a given session terminates, i.e. no CDS contract is allowed to survive the current session. This procedure will result in a profit or a loss that will then be reflected on the Total Capital Expense Account.

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Selling Protection Taking More Risk to Reduce the Cost of Capital

Alternatively, a team can sell protection on any exposure in its portfolio. This obviously increases the loss amount on the target exposure should it subsequently default. On the other hand, it also turns in an extra profit from collecting the associated CDS premium. As is true in life however, the amount of protection that can be sold is limited by the markets ability to absorb the volume. Thus, unlike for buying protection, a participating team is only allowed to sell protection to an extent computed by the system. This amount is specified on the exposure screen and changes with time. The same termination rules apply to a short position in the CDS market. It can be terminated manually by taking an off-setting long position on the same exposure, or else by trading the exposure. In case the reference exposure defaults and the team sold CDS protection on it, the corresponding amount of protection sold and the LGD of this exposure will be transferred to the Total Capital Expense account. This amount will usually be significantly higher then the regular interest payments or CDS premia. In case this happens, the penalized team will suffer significantly in terms of its ability to win the session. In practice, this will make it next to impossible to win the game. This feature is also true to life, in that credit managers trying to earn additional yield via speculation can suffer the consequences dearly.

Renting Capital from Other Teams

When capital is rented from other teams instead of the market, there are several aspects to consider. First, the amount that will be actually rented is not known until the beginning of the next time step. As a result, it is difficult to estimate this amount for budgeting purposes. However, a lending team can make a rough estimate by looking at the current state of its portfolio. In this situation, Skype can become a handy tool for negotiating with other teams on how much Short Term Capital they feel they will have available for rent at the beginning of the next round. The system will determine automatically how much capital can be borrowed. It will first compute the excess short-term capital available to a lending team that has made a prior rental agreement with a borrowing team, and transfer that amount to the Short Term Capital account of the borrowing team. In this process, it is possible that that a lending team will not have any excess capital for rent. In this case, no capital will be transferred to the renting teams account and this team will most likely have a real problem managing its portfolios default probability. As you know by now, renting capital from other teams provides the cheapest source of capital in the game. However, it also involves the risk that the lending team will not be able to provide any capital, or will have too much capital to lend. Therefore,

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communicating with other teams is crucial to find the balance between the needs and the abilities of borrowing and lending teams.

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