Valuation

In the RiskWin framework the main interaction between the internal components (Positions and Portfolios) and the external components (World States and World Variables) occurs during the valuation process.

In order to arrive at the final result, there are various stages that must occur for each valuation request. At each stage there are additional valuation requests that are made and processing that is carried out to yield the required result for that stage. The result of each stage is then returned to the next highest stage until the final result has been obtained.

Briefly, although each valuation request is made at the portfolio level, this request is propagated down through the portfolio positions to the security level. At the security level an appropriate valuation is carried out and then returned to the position level. The position level then adjust this value using the position information before returning this to the portfolio level. Once all the positions have reported valuations the final result is returned by the portfolio.

The following describes this procedure in more detail:

Valuation Specification:

Before a valuation can be carried out, it must be correctly specified.

A complete valuation is specified by:

  1. The measurement that is required;

  2. The world state under which this measurement is required;

  3. The date at which the valuation is to be done; and

  4. The currency in which the final valuation must be returned.

All of the basic measures and the advanced measures require such a specification.

Portfolio - World State Interaction:

All valuations begin at the Portfolio level and require a World State at which the valuation is to be carried out.

The portfolio first identifies all the positions that will be required in the valuation.

It then sequences through these positions requesting a valuation from each position at an appropriate Date, World State and Valuation Currency.

The results of these valuations are then processed to provide the requested measurement on a total portfolio basis - including the effect of activated What-If Positions. The total amount of processing required will vary depending on the actual measure that is requested.

Position - World State Interaction:

Each position that must perform a valuation has to formulate an appropriate valuation request of the security underlying that position.

The position then requests this valuation from the security at the desired Date, World State and Valuation Currency. This request will yield the security value on a per contract basis.

The result is then processed to return the measurement requested on a total number of contracts basis.

Security - World State Interaction:

Any security that must perform a valuation must interact with the specified World State in order to obtain the market information it might need to carry out the valuation.

Each security has been programmed to request from the World State the appropriate World Variables it might need to perform the required valuation.

Security - World Variable Interaction:

Once the security has obtained the necessary World Variables from the World State, it must make appropriate requests of these World Variables to obtain the market data required to perform the valuation.

These requests of the World Variables will depend on security specific data and also on the date for which the valuation is requested.

After all the necessary information is collected, the security carries out the requested valuation in the security's Transaction Currency. The resulting value will be on a per contract basis.

If the Transaction Currency is different from the Valuation Currency then the value is converted into the Valuation Currency at the appropriate exchange rate for the valuation date.