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
Dan Li
Dan Li is a Vice President of Financial Engineering at Numerix in New York, in charge of Fixed Income (including Interest Rate, Cross Currency, Credit, Inflation, and Hybrid derivatives) and responsible for modeling, structuring, valuations and risk analytics.
Prior to Numerix, Mr. Li worked as a Quantitative Analyst on fixed income and equity trading desks in proprietary trading firms in Chicago and performed econometrics consulting in Texas. Mr. Li holds Masters degrees in both Computer Science and Economics/Finance from Texas A&M University and is currently a PhD candidate in Management Science/Finance at the Illinois Institute of Technology in Chicago.
As Chief Marketing Officer and Executive Vice President of Global Marketing & Corporate Communications, James leads the company’s global marketing and corporate communications efforts, spanning a diverse set of solutions and audiences. He oversees integrated marketing communications to clients in the largest global financial markets and to the Numerix partner network through the company's branding, electronic marketing, research, events, public relations, advertising and relationship marketing.
Since joining Numerix in 2008, James has launched the organization’s award-winning thought leadership program, bringing to light challenges and insights from Numerix market experts. He also hosts the Numerix Video Blog, tackling the challenges pressing the derivatives markets—from regulatory issues to trading strategies.
Prior to joining Numerix, James served as Managing Director of Global Marketing and Communications for Fitch Ratings. During his tenure at Fitch, he built the firm’s public relations program, oversaw investor relations and led marketing and communications plans for several acquisitions. Prior to Fitch, James was a member of the communications team at Moody's Investors Service.
