**22**

**Calculation**

Between the input data and the output reports sits the calculation process. The calculation could be anything from a “back of an envelope” approximation taking milliseconds to a precise multi-factor mathematical model taking days to run.

The degree of expenditure in the calculation process depends upon many factors including:

• Are trusted mark-to-market valuations available in the market place?

• Is there an accepted calculation model?

• Are other valuation processes available and accessible?

• What is the required level of accuracy?

• How sophisticated are the products to be valued?

• Is scenario analysis desirable?

• What are the range and type of output reports required?

• What is the extent of risk calculations?

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**22.1 WHAT DOES THE CALCULATION PROCESS ACTUALLY DO?**

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**22.1.1 Example from outside the financial world**

In order to illustrate how to calculate the value of a trade let us consider an example of a second hand motor vehicle (see

Table 22.1).

I own a five-year-old Ford Galaxy diesel, manual transmission car. If cars with the same specification are available in the second hand car market, I can mark-to-market my car and gauge its current value. Let us suppose it is worth £ 8500.

Now my car has extras which are not part of the quoted market prices, so I need to make an estimate of their worth and add it to the price.

Hence I might mark my car as 8500 + 790 = £ 9390.

A similar example would be valuing a house. Unless identical houses are for sale in virtually the ...