What pricing models can I use in my valuation?

For each type of instrument you wish to value, LUSID provides a default pricing model:

Instrument type	Default pricing model
`Bond`, `FxForward`	`ConstantTimeValueOfMoney`
All other types	`SimpleStatic`

You can change the default pricing model for any instrument type except Equity to provide a more suitable or sophisticated result. You can even conditionally select different pricing models for the same instrument type.

Note: The pricing model you choose impacts the quantity and quality of market data required. Find out more about this.

The complete set of built-in pricing models is listed here. To help you discover what pricing models are valid for an instrument type, call the GetExistingInstrumentModels API with the LUID of an instrument of that type, for example:

curl -X GET "https://<your-domain>.lusid.com/api/api/instruments/LUID_00003D64/models?instrumentScope=default&recipeScope=default"
  -H "Authorization: Bearer <your-API-access-token>"

The response contains the currently-valid pricing models for (in this case) an equity option:

{
  "instrumentId": "LUID_00003D64",
  "supportedModels": [
    "SimpleStatic",
    "Discounting",
    "BlackScholes",
    "ConstantTimeValueOfMoney",
    "Bachelier"
  ],
  ...
}

Pricing model behaviour

For more information on pricing models specific to instruments of type FxForward, see this article and this Jupyter Notebook.

General pricing models

Pricing model	Behaviour
`SimpleStatic`	Available for all instrument types. This pricing model was designed as a simple price lookup tool that did not project cashflows. Initially it only required a price upserted to the LUSID Quote Store and it would then calculate PV as units * notional * price / scaling factor. Over time the model has evolved to now also calculate accrued interest. This has come at the cost of additional market data dependencies, so for example any instrument where the accrued interest depends on a floating rate now fails valuation if the required market data is not upserted to the Quote Store first.
`ConstantTimeValueOfMoney` (CTVoM)	Available for most instrument types. This pricing model forward projects cash flows related to the instrument, (bond coupons, principal payments and so on), which `SimpleStatic` does not produce. All projected cashflows are then summed up to calculate the present value of the instrument. There is no market data dependency on a price in the Quote Store, but some of the cashflows depend on other market data (such as floating rate fixings). Conceptually this pricing model can be thought of as a discounting pricer where all discount factors are set to 1, but this is not how it is implemented. A discounting model (see below) would calculate forward rates from the curves provided. Instead, CTVoM simply rolls forward the last observed fixings into the future. Note that while CTVoM is available for options it does not consider optionality in the calculation approach. It assumes that a spot price stays at the value it has found in the Quote Store for the valuation date until exercise date and then uses this spot price to calculate the payoff.
`Discounting`	Available for most instruments types. This pricing model uses a set of interest rate curves to project future cashflows and to calculate the present value. All interest rate curves must first be upserted to the LUSID Complex Market Data Store. The extent of required curves depends on the instrument, so for example a fixed-rate bond only requires a discounting curve in the currency of the coupon payments. Floating rate bonds and interest rate swaps also require the provision of projection curves to calculate the forward rates, used in the cashflow projections. All projected future cashflows are discounted with the appropriate curve and then summed up to the PV. Like CTVoM, this pricing model is available for options but does not consider optionality. Better valuation results are achieved by using one of LUSID's native option pricing models (see below).

Pricing model

Behaviour

SimpleStatic

Available for all instrument types.

This pricing model was designed as a simple price lookup tool that did not project cashflows. Initially it only required a price upserted to the LUSID Quote Store and it would then calculate PV as units * notional * price / scaling factor. Over time the model has evolved to now also calculate accrued interest. This has come at the cost of additional market data dependencies, so for example any instrument where the accrued interest depends on a floating rate now fails valuation if the required market data is not upserted to the Quote Store first.

ConstantTimeValueOfMoney
(CTVoM)

Available for most instrument types.

This pricing model forward projects cash flows related to the instrument, (bond coupons, principal payments and so on), which SimpleStatic does not produce. All projected cashflows are then summed up to calculate the present value of the instrument. There is no market data dependency on a price in the Quote Store, but some of the cashflows depend on other market data (such as floating rate fixings).

Conceptually this pricing model can be thought of as a discounting pricer where all discount factors are set to 1, but this is not how it is implemented. A discounting model (see below) would calculate forward rates from the curves provided. Instead, CTVoM simply rolls forward the last observed fixings into the future.

Note that while CTVoM is available for options it does not consider optionality in the calculation approach. It assumes that a spot price stays at the value it has found in the Quote Store for the valuation date until exercise date and then uses this spot price to calculate the payoff.

Discounting

Available for most instruments types.

This pricing model uses a set of interest rate curves to project future cashflows and to calculate the present value. All interest rate curves must first be upserted to the LUSID Complex Market Data Store. The extent of required curves depends on the instrument, so for example a fixed-rate bond only requires a discounting curve in the currency of the coupon payments. Floating rate bonds and interest rate swaps also require the provision of projection curves to calculate the forward rates, used in the cashflow projections. All projected future cashflows are discounted with the appropriate curve and then summed up to the PV.

Like CTVoM, this pricing model is available for options but does not consider optionality. Better valuation results are achieved by using one of LUSID's native option pricing models (see below).

Instrument-specific pricing models

Pricing model	Behaviour
`BondLookupPricer`	Available for instruments of type `Bond`, `ComplexBond` and `InflationLinkedBond`. This pricing model is a recent instrument-specific addition that combines the price lookup features of `SimpleStatic` and the cashflow projection of `ConstantTimeValueOfMoney`, plus also calculates the accrued interest. This provides more flexibility when valuing some inflation-linked bonds that also require the application of a factor in the PV calculation, for example.
`CDSLookupPricer`	Available for instruments of type `CreditDefaultSwap`. This pricing model extends `SimpleStatic` to consume either a price, a rate or a spread. A "price quote" needs to be interpreted as a Markit price quote from which a rate is extracted using the relationship of rate = (100 - Markit price) / 100. It also projects cashflows.

Pricing model

Behaviour

BondLookupPricer

Available for instruments of type Bond, ComplexBond and InflationLinkedBond.

This pricing model is a recent instrument-specific addition that combines the price lookup features of SimpleStatic and the cashflow projection of ConstantTimeValueOfMoney, plus also calculates the accrued interest.

This provides more flexibility when valuing some inflation-linked bonds that also require the application of a factor in the PV calculation, for example.

CDSLookupPricer

Available for instruments of type CreditDefaultSwap.

This pricing model extends SimpleStatic to consume either a price, a rate or a spread. A "price quote" needs to be interpreted as a Markit price quote from which a rate is extracted using the relationship of rate = (100 - Markit price) / 100. It also projects cashflows.

Option pricing models

Pricing model	Behaviour
`BlackScholes`	This pricing model is a LUSID-native implementation of the market standard BlackScholes model. It requires a lognormal volatility curve upserted to the Complex Market Data Store. If a digital option, you can use `BlackScholesDigital`.
`Bachelier`	This pricing model requires a normal volatility curve upserted to the Complex Market Data Store.
`BjerksundStensland1993`	Available for American options.