Enhancing Risk
and
Pricing Controls
The validation of complex pricing models is a key control within the trading function of any financial organisation
A US Investment Banking client engaged Calimere Point to validate their derivatives pricing models across FX, interest rates and equity derivatives portfolios. We were able to bring our deep quantitative financial markets experience to provide our client with independent validation of the specific models used and the associated assumptions which drove the valuation of their portfolio.
The Importance of Model Validation
Model validation is a critical step in the risk management process for financial institutions. It involves the rigorous assessment of mathematical models used to evaluate financial instruments, ensuring they are accurate, reliable, and compliant with regulatory standards.
Financial Services: Investment Banking
Challenges
Data Solution
Developing the Validation Methodology
Our client wanted us to provide insight into the generally accepted market practices for valuing these financial instruments and not restrict the validation to a purely academic exercise.
We 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.
Delivering the Validation: enhancing client's quantitative strategies and transparency
We successfully worked with our client’s quant teams to validate and improve the modelling approach to bring the models into line with standard market conventions
We provided comprehensive documentation for the products and models, 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.
