Complex Security Valuations, Inc. Value-added valuations 845 North Salem Road, Annex B Ridgefield, Connecticut 06877 +1 203 542-0644 570 Lexington Avenue,

Complex Security Valuations, Inc.Complex Security Valuations, Inc.Value-added valuationsValue-added valuations

845 North Salem Road, Annex BRidgefield, Connecticut 06877

+1 203 542-0644

570 Lexington Avenue, 49th FloorNew York, New York 10022

+1 212 937-2111 +1 877 278-4700 (877 CSV-4700)

FIRMA 24th National Risk Management Training ConferenceMarch 29, 2010, San Francisco, California

Valuation Strategies for Complex and Uncertain Times

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Spectrum of valuationsSpectrum of valuations

Market pricing Matrix pricing Model pricing

Listed securities

Inactively traded securities

Complex securities

CSV has targeted the most complex and challenging space of the valuations business

+ + =A full suite of valuation solutions

An intense focus on complex structures

Copyright CSV 2009 March 2010Copyright CSV 2009 March 2010

Copyright CSV 2009 March 2010Copyright CSV 2009 March 2010 33

Desirability of regulationDesirability of regulation

““To restrain a banker from issuing such notes, To restrain a banker from issuing such notes, when all his neighbours are willing to accept of when all his neighbours are willing to accept of them, is a manifest violation of that natural them, is a manifest violation of that natural liberty which it is the proper business of law not liberty which it is the proper business of law not to infringe, but to support. Such regulations may, to infringe, but to support. Such regulations may, no doubt, be considered as in some respects a no doubt, be considered as in some respects a violation of natural liberty. But those exertions of violation of natural liberty. But those exertions of the natural liberty of a few individuals, which the natural liberty of a few individuals, which might endanger the security of the whole society, might endanger the security of the whole society, are, and ought to be, restrained by the laws of all are, and ought to be, restrained by the laws of all governments..governments...” .”



Market growth will definitely Market growth will definitely continue and in an aggressive waycontinue and in an aggressive way

Moody's warns on deluge of debtThe Wall Street Journal02 Feb 2010 Moody's Investors Service warned of sizable refunding requirements for nearly 1,000 companies over the coming years, questioning whether they will be able to refinance more than $800bn (€573.7bn) in debt taken on in the middle part of the last decade.

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A Fundamental ApproachA Fundamental ApproachSpot

S

ForwardF = S (1 + RT)

= S + SRT

If T = 0 F = S

Option

Oc = F – X + V

= S + SRT – X + V

If V = 0 Oc = S + SRT – X

If V = 0 and T = 0 Oc = S – X

IG

HYDD



Market InputsMarket Inputs

Long call + Short put = Synthetic future

An importance of internal and cross-market consistencies


Continuum from known to unknownContinuum from known to unknown

Trade date

Expiration/Maturity

date

At time of purchase value is 100% known

At expiration/maturity value is 100% known

An importance of recognizing the differences between a “price” and an “evaluated price”, and having a vetted internal approach for handling both within a methodical and defensible framework


CalculationsCalculations


Challenge processChallenge process

Price challenges are appropriate at any time, on Price challenges are appropriate at any time, on any structure, and for any purposeany structure, and for any purpose

Price challenges may sometimes result in a request Price challenges may sometimes result in a request for additional information by the pricing vendorfor additional information by the pricing vendor

Price challenges are typically expressed in the Price challenges are typically expressed in the context of a value being within or outside pre-context of a value being within or outside pre-defined exceptions boundaries, and expressed as defined exceptions boundaries, and expressed as a percentage of notionala percentage of notional


Real estate securitizationsReal estate securitizations


CorporatesCorporates


SpreadsSpreads


CorrelationsCorrelations


RatingsRatings


10 items your organization should 10 items your organization should be thinking aboutbe thinking about

1)1) Are you prepared for having more than half of your indexed Are you prepared for having more than half of your indexed portfolios consisting of non-cash index instruments within the portfolios consisting of non-cash index instruments within the next three years?next three years?

2)2) Do your risk management tools allow for portfolio managers to Do your risk management tools allow for portfolio managers to view their holdings in the context of cash flows, probability, and view their holdings in the context of cash flows, probability, and time? If not, what would it take for that to happen? What is time? If not, what would it take for that to happen? What is your policy on tolerances?your policy on tolerances?

3)3) Is your present IT infrastructure positioned for facilitating or Is your present IT infrastructure positioned for facilitating or hindering the use of complex products? If not, what would it hindering the use of complex products? If not, what would it take for that to happen?take for that to happen?

4)4) Does your organization have working definitions of all the Does your organization have working definitions of all the financial products within your portfolios. If yes, are portfolio financial products within your portfolios. If yes, are portfolio managers organized by these products? If yes, who decides managers organized by these products? If yes, who decides when a product type may not be suitable for a particular when a product type may not be suitable for a particular portfolio class even if its label suggests that it’s in the right portfolio class even if its label suggests that it’s in the right place (i.e., a long-dated equity option bearing proportionally place (i.e., a long-dated equity option bearing proportionally more interest rate risk than underlying spot equity risk)?more interest rate risk than underlying spot equity risk)?


10 items, continued…10 items, continued…5)5) What is the culture of complex products at your firm? How do you What is the culture of complex products at your firm? How do you

know?know?6)6) At regular (weekly, other) portfolio management meetings, how is At regular (weekly, other) portfolio management meetings, how is

time split between the matters that are “manageable” versus time split between the matters that are “manageable” versus those that are not? Is it the right mix, and if not, how is that those that are not? Is it the right mix, and if not, how is that addressed?addressed?

7)7) Is there someone in your firm formally tasked with objectively Is there someone in your firm formally tasked with objectively vetting complex products for appropriateness, consistency, or vetting complex products for appropriateness, consistency, or ability to value? ability to value?

8)8) Is there a dedicated repository at your firm for housing computer Is there a dedicated repository at your firm for housing computer code of internally developed valuation software, inclusive of code of internally developed valuation software, inclusive of underlying white papers relevant to that software? How about underlying white papers relevant to that software? How about third-party software solutions?third-party software solutions?

9)9) Is there any person formally designated as a go-to person for Is there any person formally designated as a go-to person for questions that may be neutrally and comfortably vetted in your questions that may be neutrally and comfortably vetted in your firm relating to complex products? How widely is this known?firm relating to complex products? How widely is this known?

10)10) What on-going educational opportunities exist relating to new What on-going educational opportunities exist relating to new products, and particularly in the context of risk and reward?products, and particularly in the context of risk and reward?

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Thought leadershipThought leadership



NOTESNOTES

Documents

Complex Security Valuations, Inc. Value-added valuations 845 North Salem Road, Annex B Ridgefield, Connecticut 06877 +1 203 542-0644 570 Lexington Avenue,