What is the price of a derivative security?

Abstract

This paper analyses pricing financial instruments from different angles: it discusses classification of the instruments according to their difficulty; it presents derivative pricing methodologies and different sides in the mark-to-market vs. mark-to-holding argument; it describes challenges in data collection and cleansing, and technological systems that handle the data; it dicusses the notion of the model risk of derivative valuation. In addition, it recommends best practices to the buy-side community for valuing complex trades and also discusses the best practices for choosing independent valuation vendors.