Valuation Models

Definition

Models whose main function is the valuation of an asset or transaction, e.g. through the application of a market-observed discount factor (risk premium) to a set of projected cashflows.

A valuation model may incorporate specific capital cost and / or risk appetite elements and hence has a subjective element.

Issues and Challenges

• Under some simplifying assumptions a pricing model may postulate a unique price. In practice model choice and parametrization impact in pricing models a similar subjective element - albeit let transparent.
• Pricing models, as somewhat distinct to valuation models, establish arbitrage free prices for derivative instruments. The two concepts overlap in the case of instruments that can be priced directly with reference to market observables.