Knowing your portfolios

When determining the price testing strategy it is important to understand the
composition of the portfolios in terms of materiality, concentration and liquidity. The
key task is to validate the material and risk positions of the firm, and the practitioner
should have a sense of both the portfolio compositions and the availability of
information available. In addition to the material risks, the practitioner will consider
the sensitive issues and changes in specific positions. This understanding along with
the changes in the markets allow the practitioner to position the discretionary
elements of price testing.
The test coverage should be designed to feature the most material elements of the
portfolio and certain control elements. For example, the information on unusual
volatility in a market along with the sensitivities of the firm’s positions may be
included in the price testing report. This information should be obtained during the
price testing process. Targeting the featured area can be included with little additional
effort if the strategy is defined at the beginning of the price testing cycle. Users of the
price testing reports can be asked for their thoughts on featured areas.