The development of a real-time valuation service of financial derivatives

Abstract

Financial derivative valuation is the key of the adoption of the International Financial Reporting Standards (IFRS), which are based on fair value accounting. When the derivatives do not have an active market, the inputs and methods for estimating their fair value will be more subjective and, the derivative valuation will be less reliable. The goal of this research is to design a derivative valuation service to aid the accounting professionals to meet the reliability requirement of the IFRS which, in the derivative setting, requires derivative valuation be objective and free from errors. First, we incorporate the various valuation models and their risk factors into the service as the basis for providing an objective valuation result. Second, we provide a user interface to simplified management of parameters and provisions of term sheets of derivatives to avoid users` errors in parsing the term sheets. Third, when the users hold a large number of derivatives, the derivative valuation meets real-time constraints in financial reporting. We thus developed the service in parallel computing environment to reduce computational time of the valuation process. Experiment cal results of derivative valuation are also presented. © 2012 IEEE.