The continuing financial crisis has led to significant changes in the valuation of derivatives contracts. Fair value continues to be one of the key issues for the banking sector. Risk-free world or real world?
This discussion is influenced by technology.
New accounting standards force the adjustment of credit values (CVA) or even more controversial debit values (DVA) - DVA allows an institution to report profit as its health deteriorates ....
However, the adjustments need to rely on exposure modeling, the prediction of future cash flows of a portfolio with a counter party - if you combine both, CVA/DVA bilateral both directions and the net cash flows.
This introduces much more complexity in the valuation space, relevant to trading, risk management and accounting.
UnRisk is a valuation and risk management technology and we have already shown that, for example, the calculation of Monte Carlo VaRs with full valuation for a moderately complex portfolio needs enormous computing muscles and optimized numerical schemes for the over night valuation.
And this is what we do - make blazingly fast valuation engines and drive them over computer grids.
With CVA/DVA bilateral one may run into requirements of billions of single valuations for portfolios with a major counter party and general derivatives.
One result: with the momentary technologies it seems impossible to leave the risk-free world and the application of Libor market models for complex interest rate derivatives is questionable (the short rate models are dead - long live the short rate models?).
Not to speak of model validation and other extra tests ....
Oh yes, mathematical-finance difference and clever implementations really matter. And without bottom-up innovation it is impossible to keep pace with the requirements introduced by financial regulators.
About our 2013 Agenda.
