Delta sensitivities are usually computed to show Present Value response to 100% change in underlying market factors.

However, we can define risk factor, which has the highest expected impact on Present Value.

This can be illustrated by an example of FX Forward for EUR (settlement currency is USD) , Notional = 1,000,000 EUR, Forward USD/EUR rate is 1.3075 with Maturity = 2 years. Present Value of plain FX Forward for Euro has positive sensitivity to EUR/USD exchange rate (assuming that portfolio base currency is USD) and negative — to discounting interest rates for USD. Present Value of position increases if EUR appreciates — a contract to buy EUR under fixed rate (forward rate) would give its holder higher payoff. Similarly, if interest rate for USD increases, then future payoff is discounted by higher rate and, thus, Present Value decreases.

Note that Delta Equivalents are yield sensitivities for interest rates, and price sensitivities for exchange rates. Sensitivity column displays Present Value change for 1 bp change of underlying. See Yield and Price Sensitivity post for details about yield sensitivities.

Sensitivities presented above, however, do not allow to define expected change of Present Value for given time horizon. Let’s first try to understand what is the expected PV change for 1-month horizon across 5 groups of market factors: Interest Rates, Exchange Rates, Credit Spreads, Commodity and Equity Prices. Below we show simulation results for portfolio of 261 trades with following structure:

DeltaPV is total expected PV change, assuming that underlying market factors will have same dynamics as during 3-year period. As we can see, the portfolio is most sensitive to FX exchange rates. Expected PV change for 1-month horizon, however, is significantly lower, as volatility of currency prices is very low.