Question

can i use " internal model' in pricing the level 2 securities in fair value hierarchy ? what is the risk assessment?

does this internal model should be used in the level 3?

Answer 1

Can i use " internal model' in pricing the level 2 securities in fair value hierarchy ?

The internal model is “a risk measurement system developed by an insurer to analyse its overall risk position, to quantify risks and to determine the economic capital required to meet those risks”. Level 2 assets are financial assets and liabilities that are neither easy or overly complex to value. They do not have regular market pricing, although a fair value can be determined for them based on other data values or market prices. Sometimes called "mark-to-model" assets, Level 2 asset values can be closely approximated using simple models and extrapolation methods using known, observable prices as parameters.

Yes, we can use internal model in pricing the level 2 securities in fair value hierarchy.

Level 2 establishes a method for determining significance with quantative aspects having precedence coupled with qualitative adjustments. Unadjusted observable other than Level 1 prices such as quoted prices for a similar assets or liabilities: quoted prices in markets that are not active: or other backed inputs that are observable or can be corroborated by observable market data for the asset or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less less frequently than exchange -traded instruments. This category generally includes certain U.S. Government, agency mortgage debt securities, non-agency structured securities, corporate debt securities and preferred stocks.

What is the risk assessment?

Risk assessment is a term used to describe the overall process or method where you identify hazards and risk factors that have the potential to cause harm (hazard identification), analyze and evaluate the risk associated with that hazard (risk analysis, and risk evaluation), determine appropriate ways to eliminate the hazard, or control the risk when the hazard cannot be eliminated (risk control).  A risk assessment is a systematic examination of a task, job or process that you carry out at work for the purpose of identifying the significant hazards, the risk of someone being harmed and deciding what further control measures you must take to reduce the risk to an acceptable level. The aim of the risk assessment process is to evaluate hazards, then remove that hazard or minimize the level of its risk by adding control measures, as necessary. By doing so, you have created a safer and healthier workplace.

Risk assessments are very important as they form an integral part of an occupational health and safety management plan. They help to:

• Create awareness of hazards and risk.
• Identify who may be at risk (e.g., employees, cleaners, visitors, contractors, the public, etc.).
• Determine whether a control program is required for a particular hazard.
• Determine if existing control measures are adequate or if more should be done.
• Prevent injuries or illnesses, especially when done at the design or planning stage.
• Prioritize hazards and control measures.
• Meet legal requirements where applicable.

Does this internal model should be used in the level 3?

The internal model is “a risk measurement system developed by an insurer to analyse its overall risk position, to quantify risks and to determine the economic capital required to meet those risks”. Level 3 assets are financial assets and liabilities considered to be the most illiquid and hardest to value. They are not traded frequently, so it is difficult to give them a reliable and accurate market price. A fair value for these assets cannot be determined by using readily observable inputs or measures, such as market prices or models. Instead, they are calculated using estimates or risk-adjusted value ranges, methods open to interpretation.

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flows methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgement estimation. This category generally includes certain private debt snd equity investments.