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An Introduction to Global Valuation Claudio Albanese and Steve White present the possibilities that High Throughput Computing (GPU
 

Summary: An Introduction to Global Valuation
Claudio Albanese and Steve White present the possibilities that High Throughput Computing (GPU
Technology) opens up for risk management, and discuss the implications for investment banks in the
future.
Even when your pricing models are right, they're wrong
Every bank uses pricing models that are specific to the instrument that they are valuing, but even
when they are perfectly implemented - perfect data and properly utilised on a firm-wide basis there
are inconsistencies between the models used for each instrument.
Every valuation formula embodies two generic weaknesses;
either explicitly or implicitly, they make assumptions about the future states of underlying risk
factors, and therefore the modelling of the future is specific to each individual instrument,
rather than specific to the risk factor, and it is therefore not standardised across the whole
firm
they are calibrated to a set of chosen observable market prices, however the number of
instruments used for calibration is limited and instrument-specific, rather than more broadly
representative of the market
So while each position is "correctly" calibrated in isolation and is therefore "correctly priced", from the
broader firm-wide perspective, this instrument-centric approach to modelling bakes inconsistencies
into the valuation process impacting hedging activities, the balance sheet and capital adequacy
provisions.

  

Source: Albanese, Claudio - Department of Mathematics, King's College London

 

Collections: Mathematics