As part of the migration to a new system, our client, a top US investment bank, required certain derivative valuation models across FX, interest rates and equity to be validated. An essential part of the process was to provide insight into the generally accepted market practices for valuing these financial instruments and not restrict the validation to a purely academic exercise.
- CPRA discussed the valuation principles for each product type, as well as market standards and conventions, to enable the client to decide what models to use as the base case for each product type.
- Regression tests were designed and implemented for each product, including drill-downs into their vanilla components, to ensure that the valuation and risk numbers could be systematically checked with multiple cross-checks
- Comprehensive documentation for the products and models was provided, including synopses that could be directly forwarded to clients who wanted an understanding of the valuation and risk calculation procedure.
- Where appropriate, model shortcomings were documented and proposals were provided to address the issues.
- CPRA was asked by the client to develop a model that was more appropriate for a particular asset type following the client’s review of the validation results.