The Principles and Practice of Derivatives Price Verification

Abstract

Trading desks at investment banks often have substantial positions in a broad range of long-term or exotic derivative securities which can be marked to market only by means of mathematical models. Verifying the fair value of these securities in all product areas is an increasingly important issue for trading firms, and involves more than just mathematics and a model from financial economics. This article describes a multi-faceted approach to verifying the prices and hedge ratios of derivative securities.

Keywords: Derivatives, valuation, models, risk

JEL Classification: G13, G10, G18, G00