Technology and services for the fair value price management of illiquid bonds.
Clients and supervising authorities need great attention on monitoring of financial instruments, particularly about :
For many administered financial instruments, according to their classification, it is essential to get a 'fair ' price to compare with the one inserted in the balance sheet.
It becomes important and strategic to adequately manage the whole determination pricing process of financial instruments.
If you want to outsource the evaluation process of the Fair Value or having a benchmark to compare with your own methods, we offer the automatic evaluation service Augeos Pricing Service - APS.
It covers on average 70%-80% of the Italian Banks’ portfolios at an affordable cost. It guarantees also the availability of detailed single instrument price documentation for audit purposes.
Well managed securities monitoring is an expensive process but often underestimated.
Thanks to strong economies of scale, this practice can be more efficiently managed if assigned to independent third companies.
The quality of our information can be represented as follows:
It defines a minimum set of relevant data to feature a financial classification of an instrument.
Our classification consists of six domains:
Market Rate curves at a different maturities are adjusted to reflect the credit quality of a specific bond.
In the absence of reliable market data, it is suitable to build the implied rate curves using bonds traded in liquid markets as a proxy.
We proceed with the bond theoretical pricing valuation using appropriate pricing models for the each “building block” of the bond.
Each basic component with its consolidated cash flows is evaluated using the method of discounted cash flows, through a discounted rate curves consistent with the related rating.
Options are evaluated according to the most appropriate market models.
For each security, we deliver a report inclusive of key evidence used in describing the "fair value" of all its components.
It is important not only to have a manual that describes the adopted pricing models but also to demonstrate the working process and market data adopted to generate the fair value.
The classification of all unlisted securities is consolidated in Monte Titoli. It is the main domain of the Augeos Pricing Service and made of about 23,000 bonds.
The hybrid and complex securities are broken down into their basic components, individually evaluated, and then re-assembled to obtain the “fair value”.
For example, a fixed-rate bond with an early repayment option is calculated by pricing the two basic components:
Bonds are classified by type:
We build market rate curves, bootstrapped from bonds market prices and classified by sector/class rating.
We also use cap and floors volatilities and swaption quotations from markets.
The system performs automatically the classification and the results are monitored on a daily basis by our experts.
Based on our proprietary classifications, we are able to provide rate curves for each class.
The individual rate curves are used as the basis to calculate the fair value of unlisted securities.
Options are identified and and classified by type:
Options evaluation is based on Hull & White model : calibration first with market data and then construction of trinomial cluster.
Caps and floors values are added after having built cash flows.
We also identify and evaluate the amortization plan, properly weighting all the values to be allocated for bond reimbursement.
We compare theoretic price with:
After this checking phase the price is finally validated