A provider of independent derivatives valuation and risk reports for structured products and exotic derivatives, OTC Valuations Limited, has implemented a procedure to account for non-performance risk in its valuation process.
Under FAS 157, non-performance risk refers to the risk that the obligation will not be fulfilled and thus affects the value at which the liability is transferred. Therefore, FAS 157 requires the fair value of the liability to include an adjustment for the non-performance risk related to the liability.
In the adjustment to a liability’s fair value important role plays the comprehension of its derivation, particularly for hard-to-value derivatives with level 2 or 3 inputs. For the derivations of such sort with limited price discovery and imperfect replication OTC Val offers mark-to-model valuation based on careful calibration of industry standard models.
OTC Val employs multiple valuation techniques to address the Level 1, 2, and 3 input requirements of FAS 157. For derivatives that can be replicated with vanilla, liquidly-traded, instruments and valued in a model-independent way, the focus is on mark-to-market valuation using high-quality market data from leading brokers and data vendors.
We are pleased that we could assist our clients with their non-performance risk adjusted valuations and obtain sign-off from their auditors, says Bob Sangha, co-founder of OTC Val. Expanding our services once again is a reflection of our commitment to evolving our services and working with our clients to address their non-performance risk requirements.
L.D.