what we do
Consulting and Project Management Services
Financial Engineering and Quantitative Analysis
Financial Derivative Valuation Models
Risk Management Models and Analysis including Hedging Strategies and Solutions
IFRS 9 and AIRB Implementations and Counterparty Credit Risk Analysis
Model Validation and Verification under Basel III
Modeling Complex Optionality
Central Counterparty (CCP) Risk
Training Workshops/Seminars (public and in-house)
Model Building/Software Development
Valuation of Private Company Shares/Equity
Company Probability of Default Analysis
Financial Chaos Theory was founded as an independent derivatives consulting firm in 2003 due to a demand for quality solutioning in the financial derivatives markets - OTC and exchange traded. We are a boutique in the financial engineering and risk management fields with an emphasis on modelling the complexity of financial derivatives and structured transactions in a developing markets context. more
Financial Chaos Theory was founded as a consulting firm in 2003 due to a demand for quality solutioning in the financial derivatives markets. We are a boutique in the financial engineering and risk management fields with an emphasis on modelling the complexity of financial derivatives in a developing markets context. With more than 21 years of practical experience we bring the experts in financial engineering, derivative models and valuations, research and development, software development and risk management to the financial community - banks, trading houses, portfolio managers, hedge funds, corporate financiers and corporate clients - listed and private companies. We also facilitate training workshops and cources - either in-house or for the general public. less
After the financial crises of 2008, OTC Derivatives oversight has become a hot topic. In September 2009, G-20 Leaders agreed in Pittsburgh that: "All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements." Financial Chaos Theory can be of assistance in advising clients on how to utilise exchanges or clearing houses in trading OTC financial products. We have helped clients with implementing Basel 3 regulations as applied to Central Counter Parties (CCPs). A default/guaranty fund is now compulsory and we can help clients in getting CPSS-IOSCO compliant.
As an independent pricing expert (vendor) and valuation specialist we help our clients in fulfilling their regulatory requirements for disclosure and transparency by improving the standards for derivatives valuation. These include the pricing of hard-to-value and complex securities and structured trades. We are also of assistance if you need an expert witness.
International Financial Reporting Standards (IFRS) have been compulsory for South African listed companies for accounting periods commencing on or after 1 January 2005 - more than 100 countries have adopted IFRS. Value is thus high on every corporate agenda. Financial Chaos Theory has the experience and expertise to provide independent opinions and valuations on financial instruments.more
International Financial Reporting Standards (IFRS) have been compulsory for South African listed companies for accounting periods commencing on or after 1 January 2005; more than 100 countries have adopted IFRS. Value is thus high on every corporate agenda. Financial Chaos Theory has the experience and expertise to provide independent opinions and valuations on financial instruments. What is defined as a financial instrument? Instruments within the scope of IAS 32 and IAS 39 are
- Debt and equity investments
- Loans and receivables
- Own debt and equity
- Derivatives like interest rate swaps, currency forwards/swaps, options, collars/caps, credit derivatives
- Derivatives on subsidiaries, associates and joint ventures
- Embedded derivatives
- Financial guarantees.
Share based payments and BEE transactions are financial instruments.
Valuation can be controversial and subjective so you need an independent opinion which will stand up to scrutiny. Every valuation includes a figure. But a figure on its own may not tell the whole story or take the decision for you. Valuation isn't valuation without expert analysis and understanding of the facts behind the figures - this is where FCT steps in.
IFRS provides two models for the recognition of assets in the balance sheets - a 'cost model' and a 'fair value model'. The cost model measures the asset at cost less accumulated depreciation. IAS 39.9 defines fair value as
- the amount for which an asset or financial instrument could be exchanged or a liability settled between knowledgeable willing parties in an arms length transaction.
Market prices provide the best evidence of fair value, otherwise, a model is needed. Models like the Black and Scholes and Merton model for options is inadequate to value share based payments for instance. FCT does all valuations on models that are IFRS compliant. This might include binomial models or Monte Carlo simulations.
What is IFRS? The increasing integration of the world's capital markets has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide - http://www.sec.gov/news/press/2008/2008-184.htm. International Financial Reporting Standards (IFRS) and International Financial Reporting Interpretations are issued by the International Accounting Standards Board and may be obtained through the organisation's website: www.iasb.org. less
Derivatives and structured financial transactions are specialised fields and it is in the interest of any company to get independent advisors to confirm the valuations thereof. FCT specialises in derivative instruments and structured financial transactions. All our valuations will be IFRS compliant. We also support corporate advisors in litigation or disputes be it for arbitration, legal or regulatory purposes. We can assist in submissions to and be called as expert witnesses at court hearings or hearings of the Securities Regulation Panel (SRP) (see www.srpanel.co.za) more
Financial Chaos Theory was contracted by the JSE to developed the valuation models used by Safex to Mark-to-Model the exotic options listed as Can-Do futures. more
Derivatives is a specialised field and it is in the interest of a company to get independent advisors to confirm the valuations thereof. FCT specialises in derivative instruments and all our valuations will be IFRS compliant.Financial Chaos Theory was contracted by the JSE to developed the valuation models used by Safex to Mark-to-Model the exotic options listed as Can-Do futures. These models are used daily to calculate the initial and variation margins on these listed instruments. FCT maintains these models and develop new and custom made valuation tools for new Can-Do structures as required by Safex members. New listed products include LookBack options, LookBacks with Asian features, Barriers and Knock-In/Knock-Out (KIKO) options, Cliquet options, Binary options, Variance Swaps and many more. less
We strives to be our clients' complete source for and experts on quantitative analysis and education related to the more technical side of (buy and sell side)
- Independent derivatives pricing and model validation
- Expert witnesses
- Derivatives clearing, collateralised finance and counterparty credit risk and the Basel III definition of banks' exposures to central counterparties. This include the current exposure method (CEM), stress testing and exposure at default (EAD).
- Quantifying a CCPs default/guaranty fund and risk waterfall under Basel III criteria. We implemented the CEM, expected shortfall (ES), Expected Tail Loss (ETL), Conditional VAR and Value at Risk (VAR) models.
- Estimating initial margins (or collateral to be posted) for futures and options using Value at Risk (VAR), expected Tail Loss (ETL) and Expected Shortfall (ES) methods.
The valuation and modelling of BEE transactions for audit, risk management, financial statement and hedging purposes. morethe valuation and modelling of BEE transactions for audit, risk management, financial statement and hedging purposes. Most Black Economic Empowerment schemes are complex with inherent or embedded derivatives like options and forwards that needs to be modelled and valued. We supply a full analysis and description of the scheme where we build the model from first principles by analysing and scrutinising all the relevant legal documents and contracts between the interested parties.less
the creation, valuation and modelling of employee share incentive schemes (EOS) or share based payment schemes.morethe creation, valuation and modelling of employee share incentive schemes (EOS) or share based payment schemes. Stock option expensing is now compulsory under IFRS 2. Fair values need to be obtained from independent third parties. We offer such an independent service for listed and unlisted companies (phantom schemes). Our valuation methodology is IFRS 2 compliant and we supply full expense schedules and risk matrices.less
the valuation of derivatives (optionality) embedded in corporate finance transactions.morethe valuation of derivatives (optionality) embedded in corporate finance transactions. These include mergers and acquisitions (M&As), lending agreements between companies and company guarantees where the probability of default and credit risk plays a major role. Binomial models or Monte Carlo simulation models are used extensively. less
the creation and valuation of structured derivatives to compensate advisors. morethe creation and valuation of structured derivatives to compensate advisors. This is a field that is gaining momentum especially for newly listed companies or companies who are about to list on an exchange. FCT can advise on the best or most appropriate structure. Every structure is client specific or tailor made to the client's needs. less
pricing, valuation and modelling of traded equity, agricultural, interest rate and foreign exchange (FX) derivatives. morepricing, valuation and modelling of traded equity, agricultural, interest rate and foreign exchange (FX) derivatives. We value vanilla and exotics like lookbacks (fixed and floating strikes), cliquets, Asians (fixed and floating strike), barriers, binaries and many more. Where closed-form formulas, like the Black-Scholes equation, are not available we revert to numerical techniques like binomial and trinomial trees, finite difference techniques or Monte Carlo simulation.less
- the optimal valuation of derivatives by utilising volatility skews, smiles or surfaces. These include LOCAL and IMPLIED volatility surfaces. We use finite difference and Monte Carlo methods.
- the building of local or stochastic implied volatility surfaces through Implied Binomial or Trinomial Trees and/or parameterisation methods and the optimal calibration of the models to fit the term structure of volatility.
- structuring and issuing of derivative instruments on an exchange.
- derivative structures like guaranteed investment products.
- developing software valuation tools and systems for all of the above.
In our niche and specialised field of expertise we give our clients a comprehensive consulting service.more
In our niche and specialised field of expertise we give our clients a comprehensive consulting service.
When we consult for our clients we might do any or all of the following:
- advise a client on its risk management or financial engineering problems
- convert a client's risk management, financial engineering, derivatives pricing, or other financial problem into a mathematical model
- convert a mathematical model into a practical computational algorithm
- convert an algorithm into computer code
- document an existing model, algorithm, code, or system, and/or
- test the documented model, algorithm, code, or system.
MOST IMPORTANTLY, we can explain any or all of the above in plain English or pure mathematics to all sorts of people, with and without Ph.D.s -- such as controllers, auditors, traders, quants, asset managers, risk managers, hedge fund investors, and board members. Caveat: Of course, even we couldn't explain a model to all these people in the same room, at the same time, in the same language.
"Philosophy is written in that great book whichever
lies before our gaze - I mean the universe -
but we cannot understand if we do not first learn the
language and grasp the symbols in which it is written.
The book is written in the mathematical language, and
the symbols are triangle, circles and other geometrical
figures, without the help of which it is impossible to
conceive a single word of it, and without which one
wonders in vain through a dark labyrinth."
Galileo Galileo 1694-1723