ASC 820 Derivative Valuations (FAS 157)

ASC 820 (formerly FAS 157) provides the framework for determining the fair value of a financial asset or liability, including derivative financial instruments. ASC 820 requires companies to incorporate the risk of nonperformance in determining fair value and to use an approach that reflects the assumptions used by market participants in performing valuations and pricing credit risk.

Incorporating credit risk into the valuation of derivative poses a complex task for companies preparing financial statements.  Concurrent with the release of FAS 157, Chatham significantly enhanced its proprietary valuation methodology, to comply with the requirements of the standard. Our methodology leverages many years of experience consulting on, pricing, executing, and accounting for derivative transactions.  Our expertise, honed through working with over 1000 clients annually to hedge over $350 billion of notional every year, allowed us to bring to market the most technically accurate and computationally robust approach available.

Market-leading Methodology
Unlike simplistic approaches that rely only on the current exposure (or termination value) of a transaction to determine the underlying nonperformance risk, Chatham’s methodology calculates both current and potential future exposure, reflecting the bilateral credit risk present in many derivatives.  Our approach incorporates all of the relevant factors that can impact fair value calculations, including:

• Interest rate and foreign exchange forward curves and the market expectations of volatility around these curves
• The impact of netting where two parties have more than one transaction governed by an ISDA agreement
• Credit enhancements between counterparties (including collateral posting,mandatory cash settlements, and mutual puts)
• The term structure of credit spreads and the conditional cumulative probability of default for both counterparties

Comprehensive Coverage
Our robust calculation engine generates credit valuation adjustments (CVAs) for interest rate and foreign exchange derivatives for hundreds of companies every reporting period, providing accurate CVAs for both simple and more complex derivatives, including:

• Swaps, swaptions, and cancelable swaps across all major indices in multiple currencies
• Interest rate caps, floors, collars, and corridors – including those embedded in underlying swap agreements
• Foreign exchange forwards, options, and collars covering major and minor currency pairs
• Cross-currency swaps across major currency pairs

Analytics and Consulting
Chatham provides clients with more than just a number.  Our valuation clients count on us for support in understanding their CVAs.

• Online access to valuation reports through a secure server, allowing clients to view current and historical reporting results
• SAS70 Type II audit that verifies our calculation methodology and controls
• Preparation of financial statement disclosures
• Detailed explanations and analysis of the factors that impact CVAs and understanding on how these values can change over time

For more information on our valuation approach, see our Derivative Valuations page or download our detailed whitepaper on derivative valuations by clicking the following link.  Read the White Paper