A core tenet of modern finance (and of modern financial regulation) is the need, in many circumstances, to mark positions to market, i.e. to calibrate position valuations to be in line with observed market prices. This focus on market consistency is also a key theme for risk managers, fund managers and traders who wish to place appropriate weight on the views of other market participants. Despite its fundamental importance, achieving market consistency can be challenging even for established professionals. Not all instruments are actively traded, and even when they are they may trade with wide or variable bid-ask spreads. Interpolating or extrapolating from what is actually observable in the market place to what is needed to make the most of market consistent perspectives can tax even experts. In this book, the author carefully explains in a logical sequence when and how market consistency should be used, what it means for different financial disciplines and how it can be achieved for both liquid and less liquid positions. The author also explains why market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging parameters, and provides solutions to even the most complex problems. The focus is very much on blending mathematical rigour with practical insight, drawing upon the author’s wide practical experience across the spectrum of quantitative finance.
Book Details:
- Author: Malcolm Kemp
- ISBN: 9780470682791
- Year Published: 2011
- Pages: 376
- BISAC: BUS027000, BUSINESS & ECONOMICS/Finance
About the Book and Topic:
A core tenet of modern finance (and of modern financial regulation) is the need, in many circumstances, to mark positions to market, i.e. to calibrate position valuations to be in line with observed market prices. This focus on market consistency is also a key theme for risk managers, fund managers and traders who wish to place appropriate weight on the views of other market participants. Despite its fundamental importance, achieving market consistency can be challenging even for established professionals. Not all instruments are actively traded, and even when they are they may trade with wide or variable bid-ask spreads. Interpolating or extrapolating from what is actually observable in the market place to what is needed to make the most of market consistent perspectives can tax even experts. In this book, the author carefully explains in a logical sequence when and how market consistency should be used, what it means for different financial disciplines and how it can be achieved for both liquid and less liquid positions. The author also explains why market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging parameters, and provides solutions to even the most complex problems. The focus is very much on blending mathematical rigour with practical insight, drawing upon the author’s wide practical experience across the spectrum of quantitative finance.
With the implementation of Solvency II, Basel II, and the forthcoming IASB Fair Value Project resolution, there are more and more demands for institutions to take a market consistent approach to the valuation of their risk and asset liabilities. Market consistency is the discipline of using observed market prices when attempting to value assets or liabilities, or when using such valuations for risk management or portfolio construction purposes. For example, the final value of a futures contract that expires in 9 months will not be known until it expires. If it is valued at a market consistent level, it is assigned the value that it would fetch in the current open market.
HOT TOPIC – market consistency is right at the top of the agenda of Basel II, Solvency II and IASB Fair Value Projects. UNIQUE AND COMPREHENSIVE – covers calibration issues for liquid, illiquid and emerging markets LEADING AUTHOR – Author very well regarded in the Risk community and known for his work in fair value research and commentary.
About the Author
Malcolm Kemp (London, UK) is Director and Head of the Quantitative Research Team at Threadneedle Asset Management, responsible for the derivative desk and its portfolio risk measurement and management activities. He is a leading expert on derivatives, performance measurement, risk measurement, liability driven investment and other quantitative investment techniques. Prior to joining Threadneedle, Malcolm was a partner at Bacon & Woodrow in their investment consultancy practice. He holds a first class degree in Mathematics from Cambridge University and is also a Fellow of the Institute of Actuaries. He is a regular on the conference circuit, including Risk Europe and GARP events where he speaks on a range of portfolio management and derivatives topics.