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Financial Engineering: The Evolution of a Profession by Cara M. Marshall, Tanya Beder

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Chapter 14

Independent Valuation for Financially-Engineered Products

Cindy W. Ma and Andrew MacNamara

Houlihan Lokey

INTRODUCTION

Financial engineering has led to the creation of a wide variety of financial vehicles. Many of these are complex, making the analysis and risk management of these products more difficult than “plain-vanilla” investments. However, there are many situations that call for valuation, including portfolio management (whether to buy or sell an investment at a given value), financial reporting (including net asset value calculation), and dispute resolution. In these circumstances, it is often critical to develop a thoughtful, flexible valuation model backed up with well-researched input assumptions, and to present an analysis of multiple potential scenarios. Because of the complexity of these tasks and the amount of judgment required to analyze financially-engineered products, it is often advisable to seek an independent party (i.e., other than the portfolio managers or the members of the deal team) to help provide valuation advice. While some larger institutions have the resources to develop an internal group that provides independent views, third-party support can provide both small and large institutions with needed analytical support and independence.

Transparency has been a key issue for market participants throughout the financial crisis that started in 2007. Whether decrying the complexity of relationships between giant financial institutions or implementing ...

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