Chapter 26 Calculation

Between the input data and the output reports sits the calculation process. The calculation could be anything from a ‘back of an envelope’ approximation taking milliseconds to a precise multi-factor mathematical model taking days to run.

The degree of expenditure in the calculation process depends upon many factors including:

  • Are trusted mark-to-market valuations available in the market place?
  • Is there an accepted calculation model?
  • Are other valuation processes available and accessible?
  • What is the required level of accuracy?
  • How sophisticated are the products to be valued?
  • Is scenario analysis desirable?
  • What are the range and type of output reports required?
  • What is the extent of risk calculations?

26.1 What does the calculation process actually do?

Before looking at calculations we need to consider their purpose.

Example from outside the financial world

In order to illustrate how to calculate the value of a trade let us consider an example of a second-hand motor vehicle.

I own a five-year-old Ford Galaxy diesel, manual transmission car. If cars with the same specification are available in the second-hand car market, I can mark-to-market my car and gauge its current value. Let us suppose it is worth £8500.

Now my car has extras which are not part of the quoted market prices, so I need to make an estimate of their worth and add it to the price, as seen in Table 26.1.

Table 26.1 Extra value added above standard

Feature Estimated additional ...

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