Oscar Wilde would have loved the Twitter genre; he was a veritable epigram machine. Even though everything he wrote is now at least a century old, it hasn’t lost relevance or zing. Think of how pertinent Wilde’s statements still are on topics as diverse as
Narcissism: “To love oneself is the beginning of a lifelong romance.”
Celebrity: “There is only one thing in the world worse than being talked about, and that is not being talked about.”
Identity: “Be yourself; everyone else is already taken.”
Transcendence: “We are all in the gutter, but some of us are looking at the stars.”
Modern conveniences: “We live in an age when unnecessary things are our only necessities.”
For us, though, the best Oscar Wilde quote is from The Picture of Dorian Gray: “Nowadays people know the price of everything and the value of nothing.” Conventional literary criticism might conclude that this was Wilde’s frank assessment of the shallowness of Victorian society and its fixation on external appearances. For Dorian Gray took this superficiality to the extreme, paying the highest price (his very soul) to maintain the appearance of perpetual youth and dashing good looks, while his true self decayed because of a failure to value what truly mattered. We have to concede, the literary critics who embrace this interpretation might be right.
And yet, in our humble estimation, there may be an alternate reading of the text. Perhaps Oscar Wilde was referring not to the superficiality of Victorian society, but to the future requirement to differentiate between a financial instrument’s price (the close-out or termination price) and its value (the fair value under ASC 820). Was Wilde’s statement nothing more than a nod to the fact that accounting standards around the world would one day require the calculation of credit valuation adjustments, to help people simultaneously know the price of everything and the value of everything?
As big fans of Oscar Wilde’s writing, we at Chatham consider it a privilege to extend his work by helping companies understand the price of everything and the value of everything under ASC 820. Since this standard became effective, we’ve helped hundreds of companies in the real estate, banking, and broader corporate sectors adopt and apply the standard correctly. This Wednesday, we’ll be hosting a webinar to cover key considerations for measuring the fair value of derivatives under ASC 820, including
Valuation: How is fair value defined in ASC 820? Does credit risk need to be considered in determining the fair value of a derivative, and how do sophisticated market participants do so? When establishing a credit valuation adjustment, what impact does the existence of offsetting financial assets and liabilities with the same counterparty have?
Calculation: What’s the difference between a current exposure and potential future exposure approach to calculating credit valuation adjustments, and which is most accurate under the accounting standard? What types of modeling methods can calculate the CVA correctly, and what model inputs are required? How can total expected exposure for a given time period be quantified, and how do credit enhancements like collateral posting or mutual puts alter it? Can companies use a single credit spread for all future exposures, or do they need to construct a term structure of credit?
Accounting & Reporting: How does CVA impact effectiveness testing for a cash flow hedge under the hypothetical derivative method, and how does it differ from the impact of CVA when using the variable cash flows method? When can CVA be excluded from quantitative effectiveness assessments for fair value hedges?
Even if it turns out that Oscar Wilde wasn’t a finance genius – after all, his last words were reputed to be “Alas, I am dying beyond my means” – he taught his readers the vital importance of being earnest about the difference between price and value. If you have any questions about how the complex application of ASC 820 to your derivatives, we’d love to speak with you. And don’t forget to sign up for our webinar this Wednesday at 2 PM ET, where we’ll discuss all these topics in much more detail.