The lack of global standards for the valuation of derivatives and the corresponding lack of trust in the valuations that have been done in this area have prompted the International Valuation Standards Council to issue an exposure draft, Valuation of Equity Derivatives.
This is the first of a planned series that will include similar guidance on derivatives for foreign exchange, fixed income, and commodities. Comments on the exposure draft are due by September 30.
“All companies that hold any sort of financial instrument need to value these in their accounts, and for banks and other financial institutions these valuations are also critical for regulatory compliance,” says Ana Castañeda, the IVSC board member leading the project. “However, while trillions of dollars of derivative contracts are in existence there is too little understanding of the principles that underpin their value. Our project is aimed at identifying generally accepted good practice and bringing greater transparency and trust to the process.”
No mapping. While the exposure draft describes the main types of equity derivatives and various valuation models, it does not explain which model would be appropriate for which derivative product.
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