Valuation of Derivative Instruments

Valuation of Derivatives

In the current market scenarios, the process and methodology of valuing the derivatives has become much more complex than before and it is evolving.  FAS 157 / IFRS 13 requires that fair value be measured based on market participants’ assumptions, which would consider counterparty credit risk in derivative valuations.  Not only this, bu the accounting standards are explicit that the fair value of a liability should reflect the effect of non-performance risk, including, but not limited to, an entity’s own credit risk (as defined in IFRS 7 Financial Instruments: Disclosures). As a result, IFRS 13 requires entities to consider the effects of credit risk when determining a fair value measurement, e.g. by calculating a debit valuation adjustment (DVA) or a credit valuation adjustment (CVA) on their derivatives.

But the market has moved much beyond CVA and DVA. Today the market participants are talking about FVA (Funding Value Adjustments), XVA and many other VAs are waiting to be included in the valuation of derivatives.  All these factors not only impacts the valuation of derivatives but also have a huge impact on the financial reporting, profit margins, risk coverage.

Our valuation experts at Valuation Desk are fully aware of the the developments and the various methodologies used to calculate the CVA. DVA and FVA.  We are working with number of corporates, treasuries and financial institutions. If you need any assistance then contact one of our team members at Valuation Desk.