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Creating portfolio risk and return models [34]

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Bullet points include: Valuation engine takes inputs (e.g. interest rates, factor exposures, instrument payoff profiles) and outputs values (for instrument units) Calibration is doing the reverse If market behaviour changes then valuation engine may no longer work The less standard the instrument is the less reliable is the valuation engine Take care that inputs remain relevant (e.g. otherwise analysis might become inaccurate if market pricing changes to a new basis) E.g. overnight indexed swaps (OIS) versus three/six month LIBOR swaps Apparently good calibration may just indicate that we are good at coding not good at modelling intrinsic dynamics

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