subjective unobservable inputs

In valuation hierarchy, the last choice is “subjective unobservable input”. What is this cr*p? Can it be original cost or book value?

My assumption on this: You may mark from an internal model, and there’s a lot of stuff that goes into that pricing that may or may not be observable in the market eg: - recovery rates - correlation params eg on cdo tranches/nTD’s - vols on assets where there is no good option market (at the energy company i used to work at we would calibrate vols based on broker quotes, even though the market was practically non existent) - prepayment rates if you’re marking RMBS (although in reality you’d be more likely to mark based on an index or similar more liquid tranche) - hazard rates etc on insurance deriv’s

Would be assumptions that are not observable in the market - for example, interest rates, f/x rates, etc. are observable inputs. An unobservable input would be something you use in your valuation model that is not observable in the market - such as the items kurupt1 listed above. THink of like a CDO valuation - lots of assumptions go in there, and alot of it can get pretty “squishy”

Many thanks.

The original cost is objective and observable, but clearly unacceptable.:slight_smile: