Meet Emmanuel Sanchez. He is currently an Associate with Allianz Risk Transfer in New York City. He is one of the first students to graduate from NC State's Financial Mathematics program in 2004. We were able to chat with Emmanuel in New York City, and catch him when he visits Raleigh, North Carolina.
Part I: Education & Job Background
1) Why did you decide to get a Masters in Financial Math at NC State?
Emmanuel- I was studying at NC State to get a Masters in Computer Science at the time. It was in 1999 or 2000 before the Financial Math program had started. I was in Harrelson Hall for a Math class and a professor had pinned outside his office a description of a course he was going to teach the following semester: the course was Financial Mathematics and the professor was Jean-Pierre Fouque. I got very interested, took the class and when the program started a few years later, I enrolled full-time.
(side note - Harrelson Hall is an iconic round building at NC State's brickyard, and after many, many years of controversy it will be torn down!)
2) Briefly describe your job, and if possible list some financial products you are dealing with.
Emmanuel- I work for a company called Allianz Risk Transfer where I price and structure weather insurance. Here are a couple of examples of weather products:
- Utilities with hydro plants are dependent on rainfall. To protect them against low rainfall they could purchase a put option on cumulative rainfall.
- In the North-East and Midwest in winter, snow removal can be very expensive for municipalities. They could purchase a call option on cumulative snowfall.
Part II: Analytic techniques
3) The trend of “Big Data” implies that people do believe historical data can shed some lights on future prediction. And interestingly, such predictions may sometimes affect the future movement of the market. Is this also true in your area?
Emmanuel- In the weather business it is critical to have enough historical data. Unlike other markets like equities, it won’t be hotter or colder because people buy or sell more temperature contracts. Similarly weather forecast will have no impact on the actual weather: the fact that tomorrow’s maximum temperature in New York is forecast to be 80F won’t change the value of the actual temperature. There is no concept of implied volatility in weather.
4) In your area of specialization, what kinds of models or methods are used? Please briefly describe the basic process for applying them.
Emmanuel- For a lot of the deals I price, I do not use models. For example, if I am pricing a structure where the payout depends on cumulative rain in New York from July to September, I will first get historical daily rain data and compute the cumulative amount for the specified period. In a lot of locations (like New York) there will be at least 50 or 60 years of data available. This gives me 50 or 60 data points (1 per year). I will then try to find a probability distribution that best fits the data and use that distribution to simulate rainfall data.
Part III: Risk management
5) How do the regulation policies enacted after crisis affect the behavior of your company? Do you see this as long term trend or fad?
Emmanuel- Regulation policies enacted after the crisis (e.g. Dodd-Frank) made my company pay more attention to compliance and regulatory requirements. I don’t see this going away any time soon.
6) The goal of risk management is to achieve a balance between returns and risks. Thus, with lots of capitals and human resource spent, risk management may, to some extent, reduce a company’s profits. Driven by the motivation of maximizing the profits, will the leaders of your company pay enough attention for risk management?
Emmanuel- I work for an insurance company. Generally insurance companies have a tendency to be conservative (and definitely much more conservative than investment banks). I find my company to pay a lot of attention to risk management in general (not just financial risk management). The legal and compliance departments are very important.
Part IV: Suggestions & Advice