Surprise! "Vanilla" Derivatives Aren't So Easy to Value Any More

The derivative markets have changed dramatically since the 2008/2009 financial crisis. Regulatory reform and structural changes to the markets have resulted in increased collateralization of trades and a move to central clearing of vanilla trades. And market practitioners – and regulators – are much more focused on counterparty risk than they ever have been in the past.

Many of these changes have had an impact on how derivatives are fundamentally priced. Collateral choices impact the discounting curves used in valuations. Credit Support Annex (CSA) terms can be complex and add embedded optionality to a derivative. Counterparty risk becomes embedded in the mark-to-market value via Credit Value Adjustment (CVA). So now even the simplest of derivatives – like vanilla interest rate swaps – are much more difficult to value accurately.

On December 13, 2012 featured speaker Dan Li discussed how vanilla derivative valuations have become very complex, and how to deal with this new complexity. This webinar covered:

  • Discussion of “the new normal” for derivative valuations
    • Collateralization’s impact and the move to a multi-curve pricing framework
    • Embedded optionality from CSAs
    • CVA now part of mark-to-market value
  • Interest rate swap valuations – revisited
    • Multi-curve pricing basics
    • Multi-currency CSAs and Cheapest-to-Deliver (CTD) curve construction
    • Pricing Alignment Interest (PAI) – what is it, and why is it needed?
    • CVA – adding significant complexity to valuations
  • Additional considerations and looking to the future

Featured Speakers


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