Valuations of options, futures and swaps and alt methods

Question 1

Valuations of options, swaps and futures

Answer 1

• Options, swaps and futures are normally valued using ‘no arbitrage’ principles
• Swaps can be valued by discounting the two component cashflows

Question 2

Alternative methods to valuing portfolios where liabilities exist

Answer 2

• Approaches used above can be used to value portfolios
• Value of portfolio can be taken as a sum of the market values of the individual holdings or if
  there is no active market, a proxy market value
• The method and basis for any actuarial basis will depend on the
  o The type of liability
  o The purpose of valuation
  ▪ Valuation for regulatory purposes
• Normally prescribed by regulator
  ▪ Discontinuance valuation
• Funds are valued assuming immediate wind up
• Assets needs to be realised at immediate realisable value
• This normally looking at realisable market value – bid price and
  comparing this to the liabilities at discontinuance basis
  ▪ Ongoing valuation
• The assets and liabilities should be valued on on-going basis
• If liabilities are viewed as a stream of future cash outflows , the
  discounted cash flow model approach to valuing assets may be
  more appropriate than others