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Structured Testing

A comprehensive testing framework for financial products


Just as bees building a beehive rely on each honey comb to provide a stable base for the next, a well formed testing structure can be developed if each test builds on the tests performed before it. Furthermore, the rewards of developing a proper testing structure far exceed fulfilling risk management requirements.

Confidence that pricing is correctly, reliably and efficiently performed can only be achieved through a comprehensive testing framework. 

Testing new product pricing models for plausibility is not enough to guarantee that pricing is correct.

Sound pricing requires focused and structured testing framework including:

  • A thorough examination of all parameters required for each model
  • Demonstration of the limitations of the model and numerical methods applied
  • Determination of the calculation speed and precision trade off
  • Regular testing of IT systems and data inputs for systematic errors
  • Stress-Testing of the model and parameters including extreme market
    conditions, such as low market liquidity.

Much more can be gained through implementing a sound testing framework than just promoting good risk management.

  • Price quality assurance
  • Identification of risky product behavior
  • Uncover systematic pricing errors
  • Understand modeling weaknesses and limitations
  • Describe precision and efficiency tradeoff
  • Safely introduce new products
  • Key for sound risk management
  • Avoid costs, including reputation risk, from mis-pricing
  • Support active hedging strategies
  • Provide pricing quality even in instable market conditions.

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