Chatham is the largest independent provider of outsourced FAS 133 and FAS 157 services, and values thousands of derivative financial instruments and FAS 157 credit valuation adjustment calculations for its clients, including interest rate swaps, options, and FX forwards.
Chatham’s models have been reviewed and recommended by many of the top accounting firms and leading valuation experts.
FAS 157, which became effective for annual periods beginning after November 15, 2007, defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about instruments accounted for at fair value.
Historically, derivative transactions were valued at the settlement (or termination) value and did not reflect credit risk or changes in credit risk, as required by FAS 157. Our FAS 157 models and methodologies incorporate both counterparty credit risk and our client’s own credit risk, in addition to (1) master netting arrangements and (2) the terms of any credit enhancements to the derivative transactions, as applicable.
Our models also consider both the current exposure and potential future exposure of derivative transactions, consistent with how credit risk is ultimately priced in the marketplace by derivative dealers.
Derivative values experience ongoing changes due to changes in time and market conditions. For example, an interest rate swap with a fair value of zero at inception has no current exposure, but has potential future exposure because it can become an asset or liability in the future as rates and time change. Therefore, considering both the current exposure and potential future exposure will provide a more accurate assessment of the true credit exposure of a derivative contract.
Given the unique challenges related to credit risk, calculating fair values for derivative financial instruments in accordance with FAS 157 can be extremely complicated. Additional information on the impact of FAS 157 on derivative instruments is available via our white paper here.
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