Major European Investment Bank
• Derivatives Valuation
• Financial Instruments Pricing architecture
For the production of daily analytics of its derivatives portfolio, the client was considering building an independent and properly documented in-house pricing platform for the valuation of derivatives, the construction of yield curves and the production of various relevant risk sensitivities.
The Derivatives Valuation Unit within the Risk Management department at the client performs derivatives pricing through a third-party library. To remediate difficulties and shortcomings to this setup, and boosted by the acquisition of in-house derivative valuation competences, the client has set out on creating alternatives, starting with the development of new methodological documentation and the prototype of a pricing platform.
Finalyse was to provide independent advise about how the current efforts could be scaled up to a complete derivative solution over the next years. The project covered schema and design for all instrument types used in a multi-curve framework for yield curve bootstrapping; the pricing of vanilla swaps and the choice of interface with source systems for both batch mode and excel interface. Typical outputs, besides the valuations, are cash flows forward value (in domestic currency), present value (in EUR), call probabilities for callable swaps and sensitivities for all trades.
The past Valuations framework relied on a third-party software for all its pricing needs. This, over the years, has led to a number of unfulfilled key business needs. The development of an in-house independent pricing library, under the Derivatives Pricing Framework project lead to the following:
Increased transparency into the various methodology decisions, the architecture choices and various market, trade and reference data attributes.