Description
For a leading bank in the Kingdom of Saudi Arabia, the development of the trading activity required a comprehensive and independent review of pricing models and methodologies across a wide range of financial instruments.
This involved validating the end-to-end pricing chain to ensure accuracy, robustness, and alignment with market standards, supporting reliable risk management and business growth.
Key challenges
- Price differences observed with interbank counterparts.
- Use of vendor models (Murex MX.3 platform) rather than in-house developed models.
- Large scope to cover in a reduced time, from linear rate and FX products, to vanilla optional products, and exotics.
Alef's approach: Comprehensive pricing models validation
Alef conducted an extensive review of the bank's pricing models and methodologies. The work focused on three critical pillars: market data sourcing and calibration, models choice and parametrization, and thorough outcome testing to identify any implementation issues.
Market data review
- Market data validation, from sources review, to market data quality assessment.
- Rate curves validation, including instrument selection, interpolation and extrapolation methodologies, and calibration validation.
- Volatility surfaces and cubes validation.
Model documentation and theoretical assessment
- Extensive documentation of the pricing models and methodologies.
- Assessment of their theoretical soundness, fitness for purpose, and alignment with market practice.
Outcome testing
- Outcome testing, covering the curves, volatilities and pricing models.
- Benchmarking against independent challenger libraries developed internally at Alef Analytics, leveraging QuantLib where relevant.
The delivery resulted in a list of findings and actionable recommendations. It was complemented by close collaboration with the client's teams to ensure knowledge transfer and smooth integration of the recommendations.
Products scope
During this validation, a wide range of rates and FX instruments was covered, including:
- Linear products: IBOR and RFR swaps, Xccy swaps, etc.
- Vanilla optional products: IBOR and RFR caps/floors, swaptions, etc.
- Exotic products: Callable swaps, range accruals, FX TARF, etc.
The models ranged from cash flow discounting, to Hull-White and FX local volatility models.
Key benefits
- Successful model validation, progressing within the target timelines and with a reduced cost.
- Actionable recommendations to enhance the modelling, resulting in pricing in line with the market standards and with the counterparts.
- Comprehensive model documentation and compliance with SAMA regulatory expectations.
Key takeaways
- Alef's deep double expertise in pricing methodologies (models, parametrization, numerical methods, calibration, etc.) and Murex MX.3 platform and models implementation proved valuable.
- Demonstrated ability to cover a wide range of financial instruments efficiently.