Case study:

Model validation for a European bank.

Summary:

We were hired by a large European bank to perform model validation.

Client requirement:

The client was a large European investment bank, trading and hedging derivatives on all asset classes in large size. The client had an internal model validation team, but due to staffing issues this was proving to be a bottleneck to growing the business. We were asked to provide temporary resource to help release this bottleneck.

Solution:

We validated several models, third-party and in-house, both in isolation and in terms of their implementation within the bank’s main derivative system.

Initially, we validated several aspects of the ITO33 convertible bond model. The basic model had already been validated – we validated such features as hard calls, puts, dividend protection, mandatories and ASCOTs. We then validated the implementation of the model within the bank’s Calypso system.

As part of this validation, we identified bugs within the ITO33 code which were new to ITO33 themselves.

We then tested two further products. We tested the built-in American FX option pricer within Calypso; and we tested the in-house bond option model implemented as an add-in to Excel.