Valuation of financial instruments
Valuation of financial instruments is the process of determining their financial value based on various factors such as current market conditions, projected income, and risks. The process may include the valuation of securities (shares, bonds), derivatives (options, futures), investment portfolios, and other financial assets and instruments.
Valuation enables investors, traders, companies, and financial institutions to make informed decisions related to purchase and sale of various instruments, to manage risks and investments. The valuation report can be used to support investment decisions and shared with regulators, auditors, and other stakeholders.
The valuation of financial instruments involves the following stages:
- Data collection. This may include data on the current and historical price, transaction volume, company financial statements (for shares), and other relevant information.
- Approach selection. The stage involves choosing an appropriate valuation method based on the instrument’s characteristics. For instance, share valuation involves using a comparative analysis, income or cost approach, while pricing and risk modelling are most often used to value derivatives.
- Forecasting future parameters. Some approaches, such as the income approach, require projecting future financial parameters of the instrument (income, dividends, growth rates, etc.). Forecasting may include analysing financial statements, macroeconomic factors, and other variables that may affect the financial instrument.
- Value calculation. Based on the chosen approach and collected data, the instrument’s value is calculated. This may be a calculation of the current market value, intrinsic value, option price, etc. depending on the valuation’s objective.
- Risk assessment. One crucial step is assessing the risks associated with the financial instrument. These may include volatility, asset correlation, credit risk (for bonds), liquidity and other factors impacting the instrument’s value and stability.
- Final valuation and analysis. Once all calculations and valuations are completed, the results are reviewed in order to ensure the reasonableness of the instrument’s price.
- Documentation and reporting. The findings obtained during the valuation process are compiled into a detailed report.
Upon completion of the valuation of financial instruments, the client receives:
- Professionally compliant valuation report.
- Assessment of risks associated with financial instruments to identify potential threats and negative scenarios, and take measures to mitigate or manage them.
- Insights into investment value to guide portfolio decisions about buying, selling or holding financial instruments.
- Expert review of the valuation report by RSA (Russian Society of Appraisers) (if required).
Creating prospects by evaluating opportunities
