Issue
The merchant energy company’s Risk and Trading groups disagreed on the valuation of certain option instruments:
- Proper valuation was required for mark-to-market disclosure.
- The two groups could not agree on the client's true exposure.
- The source of the discrepancy had to be found and resolved to produce trustworthy numbers.
Solution
Our consultant combined option-pricing math with the business intent of the deals to find the true source of the disagreement:
- Evaluated the options for sensitivity to base inputs - prices and volatilities.
- Applied a common-sense review of model results to validate findings.
- Recommended deal-entry changes so the deals modeled the client's actual exposure.
Result
Correcting deal entry improved data integrity, producing a more accurate P&L and a mark-to-market that Risk, Trading, and management could all trust for disclosure.
“I do have a major concern: things have gone too smoothly! Most of the issues that did come up were resolved long before they were brought to my attention. That said, this was one of the strongest project teams that I have been associated with.”
Project Sponsor
Merchant Energy Company
Key Takeaways
- Pairing option-pricing math with the deal's business intent - and testing sensitivity to prices and volatilities - located the true cause and produced a mark-to-market both front-office and mid-office could trust.
- Accurate valuation is an alignment problem as much as a mathematical one. Correcting how deals are captured improved P&L integrity and management decisions across front office and risk - transferable to any firm reconciling model output with trading reality.
Ready to do the same?
Are Risk and Trading booking different values for the same instrument? MidDel reconciles valuation at the deal-entry level so your mark-to-market holds up under scrutiny. Let's talk.
