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Function documentation Residual Method Valuation Model 

Use

You can use the residual method to valuate individual parts of structured products.

To determine the value of a particular part of the financial instrument or transaction, the residual method first calculates the net present values of the remaining parts and of the overall financial instrument or contract. The residual method calculates the required value as the difference between the two values.

Background documentation 

You can use the residual method valuation model to valuate embedded derivatives, for example. This valuation model can be used by Balance Analyzer for the key date valuation, among other things.

Integration

The residual method is a method within the fair value server. This method calls up the fair value server recursively. During the valuation, the system calls up the method schema of the risk basis and the Structure linkprice calculator.

Prerequisites

To use the residual method, you need to make settings in Customizing for the fair value server. You define the valuation rules for which the system is to use the residual method in Customizing for Bank Analyzer by choosing Accounting ® Service Functions for Risk Basis ®Fair Value Server ® Edit Environment for Fair Value Server and Set Up Derivations.

Example

·  Warrant bonds

You can use the residual method valuation model to valuate the warrant of a warrant bond, for example. You might want to do so if the subinstruments or partial contracts can be separated and market prices exist for the warrant bond, the warrant, and the bond. To ensure that the warrant bond and all of its parts are valuated consistently, you can use the residual method valuation model to calculate the value of the warrant as the difference between the values for the warrant bond and the bond (ex-dividend).

·  Loan with notice right

 

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