Key factors in optimal valuation process

The pricing of OTC and complex derivative products is a challenging and complex process. The process requires choosing the appropriate pricing model depending on the asset class covered and the type of instrument within each asset class. We provide the following information and reports for the valuation process –

• Description of the model
• Source of the valuation model
• Whether external model or internally developed model
• Numerical method used such as Monte Carlo, Lattice, Finite Difference etc
• Inputs for the model
• Market data sources
• Simplification of model assumptions depending on the shape of the yield curve on correlations taking into account smiles etc
• Relevance of the model used
• Mathematical details and associated formulas
• A precise description of the payoff

4 step model validation procedure

• Analysis of the underlying risk factors of the product
• Assumptions review
• Implementation controls
• Assessing the uncertainty ( numerical approximation, calibration choice, absence of market consensus on model choice)

Model verification Procedure

• Is there a periodic review of the model? At what frequency
• What happens if an anomaly is detected?
• Methodology Survey
• Backtesting

Key Quality Check Points in Valuation Process

• Sanity checks on the inputs ( market data and parameter)
• Thorough control of outputs ( prices and sensitivities)
• Provide detailed expertise in financial engineering and quantitative expertise
• Verification of the operational process
• By reconciliation with counterpart prices
• By using another suitable model for the benchmark
• By ensuring that the MTM variations could be explained by Greeks and market parameters variations

A full comprehensive report is generated for the independent valuation which can be used by the company and the auditors. A full transparency is provided including the model documentation, market data and parameters, data validation rules used and documentation about the operating process. Pyxis dedicated staff provides technical and functional support to the client for any further support.