The lack of liquidity and the complexity of market, means that many positions cannot
be easily hedged. In this case, the risk-free pricing models may over-estimate the
value of deals since such deals will carry significant market risk that should be
factored into the price.
It is thus important to assess the profit and risk impact the deal will make on the
overall portfolio. In turn, this may require a re-optimization of portfolio using all
available hedges, which can be a complex process, creating additional model and
operational risk in the assessment of complex deals.
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