Computational Finance and European Regulation
Regulation (EU) No 1286/2014 of the European Parliament and of the Council of 26 November 2014 on key information documents for packaged retail and insurance-based investment products (PRIIPs) requires that producers of PRIIPs give key information documents (KIDs) on these products to the investors.
These KIDs have to describe the risk and the possible returns and the costs of such instruments on not more than 3 A4 pages.
Structured financial instrument belong to the class of financial instruments that have to be equipped with PRIIPs KIDs.
The annexes to the regulation describe the necessary calculation steps in preparing the KIDs: In most cases, it turns out that for a time horizon of the recommended holding period (RHP) of the instrument (which may be several decades) a Monte Carlo simulation for the development of the underlying risk factors has to be set up with at least 10.000 Monte Carlo paths. For long RHPs, this may lead to 10.000 (number of paths) times 10.000 (number of observation dates in 40 years) calibration and / or valuation steps. This may become even worse, when early exercise rights come with the instruments.
Tomorrow, Andreas Binder will speak at a practitioner’s conference in Vienna on the mathematical challenges in generating PRIIPs KIDs
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