Beruflich Dokumente
Kultur Dokumente
Case 1-Hierarchy
Key issues:
Active vs inactive markets
We cannot simply use quoted prices in inactive markets. Quoted prices may require significant adjustments to reflect market inactivity. Further, a change in valuation techniques may be necessary (e.g. it may require use of a combination of several techniques, such as market and present value approaches)
Which valuation techniques are used If any valuation technique uses unobservable inputs, level III classification is triggered automatically.
Classification: CDO
Answer: Level III.
Markets are inactive (both for the security held and for similar securities). Uses income based approach to value the security. The inputs used are:
(1) Implied rate of return of 15% for the CDO on the basis of last date of the market for the CDO (observable) (2) Credit spread of 2% based on FFC estimates (unobservable) (3) Liquidity spread of 3%, also estimated by FFC (unobservable) (4) Non-binding broker quotes based on proprietary models (unobservable). Because (2) and (3) had a material impact on valuation, it automatically triggers level III classification.
Gasoline swap
Classification: Level III. Why
Not level I since no price quotes exist for this particular contract. Inputs:
Independently quoted unleaded gasoline forward price curve for one of the three years remaining under swap (observable) For last two years of the swap, FFC uses a forward curve obtained from a third party pricing service which constructs the forward curve using proprietary model that incorporated projected global supply and demand (unobservable) FFC calculates credit valuation adjustment (CVA) for credit worthiness of counter-party (unobservable)