ETRM Deal Modeling and Valuation

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Issue


A client’s Risk and Trading groups were in disagreement about the valuation of certain option instruments. Proper valuation was needed for mark-to-market disclosure. Our objective was to determine the source of the discrepancy and gain agreement between Risk and Trading.


Solution


Our consultant combined his knowledge of the mathematical models supporting option valuation and the business purpose of the option deals. The options were then evaluated for sensitivity to base input parameters (prices and volatilities). He used a common sense review of the model results to validate findings and recommended deal entry changes to model the deals to accurately reflect the client’s exposure.


Result


Correcting the deal entry process improved data integrity leading to a more accurate P&L and improved decision-making capabilities for the client’s management, front office and risk personnel.