Following developments over the past year, SuperDerivatives has released its new liquidation ‘Exit’ pricing to address the financial risk in OTC options in current market conditions. The firm made the move following growing client demand identified in discussions with customers, who are seeking more realistic pricing in light of current market conditions.
Starting with initial evaluations in 2006 for a couple of prime brokers, SuperDerivatives liquidation “Exit” pricing has evolved into a market offering that aims to meet demand for liquidation price-based valuations amplified due to the FAS 157 regulation and the recent credit crunch crisis. FAS 157 requires firms to offer “the price that would be received to sell an asset or paid to transfer a liability”; or, in other words, define the exit price of all instruments in a portfolio to calculate market value.
The new offering uses a benchmark model for bid and ask prices to calculate the liquidation price for all types of financial portfolios. It then provides liquidation prices for the time of calculation for any retroactive dates in the independent portfolio service. This eplicates market entry and exit liquidation by accurately calculating the unique “bid/offer” spread for each specific structure. It then adapts spread levels based on inter-product correlations, something that has been in need since the recent market crisis and changing market conditions. The service includes those portfolios that contain illiquid OTC derivatives and allows an assessment of the portfolios collective impact on liquidation price.
With a client base that includes buy side firms, including a number of asset managers and hedge funds, as well as sell side brokers, SuperDerivatives aims to provide a fair value disclosure for any investors expecting a liquidation event. It is in this area that SuperDerivatives believes its pricing will be popular, as recent market conditions necessitate redistribution of risk exposure.
SuperDerivatives’ new service provides a more conservative revaluation for pricing to give a more realistic price for the portfolio. And since the only price that matters to most portfolio managers currently is the exit price, demand for this liquidation ‘Exit’ pricing has grown tremendously since the capability was first used in 2006.
As a benchmark for derivatives pricing, SuperDerivatives aims to introduce transparency to all major traded derivative classes, including equities, credit and commodities. With a history of providing prices to reflect the inter-dealer market, helping many trading professionals on the buy and sell side, SuperDerivatives offers a wide variety of modeling techniques and reliable market data.
“Today’s financial crisis has proven that none of the available models, or ‘standard analytics’ can be used for universally calculating the fair value of options; and there is no off the shelf model for determining bid-ask spread,” says Dani Weigert, head of revaluation services. “SuperDerivatives’ liquidation price-based valuation is therefore unique and cannot be generated by other revaluation providers.”