Understanding, analysis and evaluation of derivative financial instruments
By whom and how it is handled in your company the derivatives portfolio?
The instruments used for measuring fair value and risk are adequate?
Underestimating the management and control of derivatives may erode margins from operations.
The evolution of derivative financial instruments has produced a large and sophisticated portfolio of tools that can be used both for hedging purposes and for trading. Their main advantage is the flexibility and the ability to draw financial profiles tailored to the needs of any business. On the other hand there are some aspects of risk related to use of these instruments to be considered:
– the exchange takes place mainly outside the regulated markets;
– these instruments are traded on markets “Over the Counter” generally not very liquid and transparent;
– the correctness of their price is often difficult to assess.
VFH specialists were able to see as a misuse or an incomplete understanding of the operation often raise rather than reduce, the level of underwriting risk of the derivatives.
The complexity of the valuation techniques and assumptions underlying the models used to calculate the fair value of derivatives activities make appropriate periodic validation of input data and algorithms used by testing and sensitivity analysis carried out by persons independent of actors directly involved.
For these reasons our team has developed extensive experience in the following areas:
– evaluation of complex structures of derivatives written on interest rates, exchange rates and commodities through the application of different pricing methodologies considered best practices of the market (Black & Scholes, binomial and trinomial trees, Monte Carlo etc.).
– development of models for carrying out the retrospective effectiveness test using the methodology of Dollar Off-Set Method;
– development of models for the performance of the prospective effectiveness test methods according to the Volatility
– Reduction Method and Regression Method.